DCIT 4(2)(1), MUMBAI V. SPS SHARE BROKERS P.LTD, MUMBAI

ITA 139/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5808 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 11-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Assessee Lawyers: KIRAN M
• Keywords: Business income; Transactions in derivatives; Speculation loss
• Section: 143(3); 115JB; 43(5); 12; 28; 11

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.139/ MUM/2016 ( / ASSESSMENT YEAR : 2012 - 13) DCIT 4(2)(1) R.NO. 642, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020 / V. M/S. SPS SHARE BROKERS P. LTD., 121/ 4, AGRA BUILDING, M.G. ROAD, 1 ST FLOOR , FORT, MUMBAI 400001 ./ PAN : AABCS9622C ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY : SHRI V. JUSTIN ASSESSEE BY: SHRI. KIRAN M. PANCHOLI / DATE OF HEARING : 04.07.2018 / DATE OF PRONOUNCEMENT : 27 .07.2018 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE R EVENUE, BEING ITA NO. 139/MUM/2016, IS DIRECTED AGAINST APPELLATE ORDER DATED 05.10.2015 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 9, MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR ASSESSMENT YEAR 2012 - 13, THE APPELLATE PROCEEDINGS HAD ARISEN BEFORE LEARNED CIT(A) FROM ASSESSMENT ORDER DATED 23.03.2015 PASSED BY LEARNED ASSESSING OFFICER (HEREI NAFTER CALLED THE AO) U/S 143 (3) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) FOR AY 2012 - 13. I.T.A. NO.139/MUM/2016 2 2. THE GROUNDS OF APPEAL RAISED BY THE R EVENUE IN THE MEMO OF APPEAL FILED WITH THE INCOME - TAX APPELLATE TRI BUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER: - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE LOSS ON ACCOUNT OF FOREIGN CURRENCY FUTURES AS BUSINESS LOSS IN SPITE OF THE F ACT THAT THE FOREIGN CURRENCY FUTURES CANNOT BE TREATED DERIVATIVE TRANSACTIONS AS PER PROVISIONS OF CLAUSE (AC) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956. 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE FOREIGN CURRENCY FUTURES AS DERIVATIVE IN SPITE OF THE FACT THAT THE FOREIGN CURRENCY DOESN'T COMES UNDER THE PREVIEW OF SECURITIES AS PER PROVISIONS OF CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956. 3. 'THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY.' 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BEING MEMBER OF BOMBAY STOCK EXCHANGE (BSE) , NATIONAL STOCK EXCHANGE (NSE) , MCX - SX AND PARTICIPAN T OF CDSL. THE ASSESSEE CLAIM ED LOSS OF RS. 5,44,52,507/ - ON ACCOUNT OF LOSS ON FOREIGN CURRENCY FUTURES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 143(2) OF THE 1961 ACT, T HE ASSESSEE WAS ASKED BY THE AO AS TO WHY SUCH LOSS SHOULD NOT BE DISALLOWED AS BUSINESS LOSS , THE ASSESSEE SUBMITTED BEFORE THE AO AS UNDER: - NOTE ON CURRENCY LOSS BEING ALLOWED AS A BUSINESS LOSS . SEC 4 3 (5) WAS AMENDED VIDE FINANCE ACT, 2005, WHEREIN AN AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE 27(AC) OF SECTION 228 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 [SEC 43(5)(D)] ELIGIBLE TRANSACTION AND RECOGNISED STOCK EXCHANGE HAS BEEN DEFINED AS UNDER: - '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 A CT, 1992 (15 OF 1992) OR THE DEPOSITORIES ACT, 1 996 (22 OF 1 996) AND THE RULES, REGULA TIONS OR BYE - LAW S MADE OR DIRECTIONS ISSUED UNDER TH OSE ACTS OR BYB HANKS OR MUTUAL FUNDS ON A RECOGNISED STOCK EXCHANGE; AND (B) WHIC H IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER OR SUB - B ROKER OR SUCH OTHER INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY A CT REFERRED TO IN SUB - I.T.A. NO.139/MUM/2016 3 CLAUSE (A) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT: (CLAUSE (I) TO EXPLANATION 2 TO SE C. 43(5)] 'RECOGNISED STOCK EXCHANGE' MEANS A RECOGNISED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (I) OF SECTION 233 OF THE SECURITIES CONTRACTS (RE GULATION) ACT. 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS M A Y BE PRESCRIBED AND NOTIFIED BY THE C ENTRAL GOVERNMENT FOR THIS PURPOSE,') ' (CLAUSE (II) TO EXPLANATION I TO SEC. 43(5)) CONSEQUENT TO THE AMENDMENT, THE NATIONAL STOCK EXCHANGE OF INDIA AND BOMBAY STOCK EXCHANGE LIMITED WERE NOTIFIED AS RECOGNIZED STOCK EXCHANGES FOR THE PURPOSE OF SEC 43(5 )(D) VIDE NOTIFICATION NO. 2/2006 DATED 25.01.2006. T HE EXPLANATORY MEMORANDUM INTER - ALIA STATES THAT AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES CARRIED OUT ON THESE TWO STOCK EXCHANGES WITH EFFECT FROM 25TH JANUARY, 2006 SHALL NOT H E DE EMED TO BE SPECULATION TRANSACTION '. ALL OUR TRADES IN THE CURRENCY DERIVATIVES ARE CONDUCTED IN THE RECOGNISED STOCK EXCHANGE OF NATIONAL STOCK EXCHANGE OF INDIA LIMITED (NS E ). THE SAME HAS BEEN CONFIRMED BY THE AO ON VERIFICATION OF ALL THE TRADES DIRE CTLY FROM THE EXCHANGE. HENCE, AS PER THE AMENDED PROVISIONS, CURRENCY DERIVATES ARE BUSINESS TRANSACTIONS AND NOT SPECULATIVE COPY OF THE NOTIFICATIONS IS ALSO ENCLOSED HEREWITH. ALSO, THE PROFIT LOSS ON CURRENCY DERIVATIVES HAVE BEEN ACKNOWLEDGED AND CONFIRMED BY THE SCRUTINY IN THE PREVIOUS YEAR AS BEING BUSINESS PROFIT / LOSS. THE AO REJECTED THE AFORESAID CONTENTION S OF THE ASSESSEE RELYING O N THE PROVISION S OF SECTION 43(5)(D) BY HOLDING THAT FOREIGN C URRENCY FUTURE ARE NOT COVERED BY PROVISIONS O F S ECTION 2 OF THE SECURITIES CONTRACT S ( REGULATION ) ACT, 1956, AND HENCE AS PER AO THE LOSS OF RS. 5,44,52,507/ - CLAIMED BY THE ASSESSEE ON ACCOUNT OF FOREIGN CURRENCY FUTURES WAS NOT ALLOWED BY THE AO AS BUSINE SS LOSS BY HOLDING THAT THE SAID LOSS HAS AR ISEN FROM SPECULATIVE TRANSACTION AND IS A SPECULATIVE LOSS WHICH WAS ALLOWED TO BE CARRIED FORWARD BY THE AO AS A SPECULATIVE LOSS TO SUBSEQUENT YEARS BUT NOT AS A BUSINESS LOSS , VIDE ASSESSMENT ORDER DATED 23.03.2015 PASSED BY THE AO U/S 143(3) OF THE 19 61 ACT . 4. AGGRIEVED BY THE ASSESSMENT FRAMED BY THE AO U/S 143(3), T HE ASSESSEE FILED FIRST AP PEAL BEFORE LEARNED CIT(A) AND CONTENDED AS UNDER: - ' THE ASSESSEE COMPANY IS A SEBI REGISTERED SHARE - BROKER, INTER - ALIA, HOLDING MEMBERSHIPS IN THE CURREN CY DERIVATIVES SEGMENT OF THE NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSE). SEC. 43(5) OF THE INCOME TAX ACT, 1961 DEFINES A SPECULATIVE TRANSACTION AS UNDER: I.T.A. NO.139/MUM/2016 4 '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 SCRIPS:' IT ALSO CARVES OUT CERTAIN EXCEPTIONS TO THE ABOVE DEFINITION. SEC 43(5) OF THE INCOME TAX ACT , 1961 WAS AMENDED VIDE FINANCE ACT, 2005, WHEREIN CLAUSE (E) WAS INSERTED TO PROVIDE THAT AN 'AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVE REFERRED TO IN CLAUSE 27[(AC)] OF SECTION 228 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. 'ELIGIBLE TRANSACTION' AND 'RECOGNISED STOCK EXCHANGE' HAS BEEN DEFINED AS UNDER: '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 CONT RACTS (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 MUTUA L 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 ALLOT TED UNDER ANY ACT REFERRED TO IN SUB - CLAUSE (A) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; [CLAUSE (I) TO EXPLANATION 2 TO SEC. 43(5)] 'RECOGNISED STOCK EXCHANGE' MEANS A RECOGNISED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 233 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS US MAY BE PRESCRIBED AND NOTIFIED34 BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE;]' [CLAUSE (II) TO EXPLANATION 1 TO SEC. 43(5) CONSEQUENT TO THE AMENDMENT, THE N ATIONAL STOCK EXCHANGE OF INDIA LIMITED AND BOMBAY STOCK EXCHANGE LIMITED WERE NOTIFIED AS RECOGNIZED STOCK EXCHANGES FOR THE PURPOSE OF SEC. 43(5)(D) VIDE NOTIFICATION NO. 2/2006 DATED 25 - 01 - 2006. THE EXPLANATORY MEMORANDUM INTER - ALIA STATES THAT AN ELIG IBLE 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'. AS SEEN ABOVE, A NEW CLAUSE (D) HAS BEEN ADDED TO THE PROVISO TO SECTION 43(5), EXCLUDING CERTAIN DERIVATIVES TRADING TRANSACTIONS FROM THE DEFINITION OF 'SPECULATIVE TRANSACTION'. SUCH EXCLUSION OF DERIVATIVES TRANSACTIONS IS HOWEVER SUBJECT TO CERTAIN CONDITIONS. THESE CONDITIONS ARE: THE TRANSACTION SHOULD HAVE BEEN C ARRIED OUT ELECTRONICA LLY ON A SCREEN - BASED SYSTEM. ALL THE DERIVATIVES TRANSACTIONS CARRIED OUT BY THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION WERE CARRIED OUT ON AN ELECTRONIC SCREEN - BASED PLATFORM. I.T.A. NO.139/MUM/2016 5 THE TRANSACTION SHOULD HAVE BEEN CAR RIED OUT THROUGH A STOCK BROKER OR SUB - BROKER OR OTHER INTERMEDIARY REGISTERED UNDER SECTION 12 OF THE SEB1 ACT, 1992 IN ACCORDANCE WITH THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, THE SEBI ACT, 1992 OR THE DEPOSITORIES ACT, 1996 AND THE RULES, REGULA TIONS OR BYE - LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS, OR BY BANKS OR MUTUAL FUNDS. ALL THE DERIVATIVES TRANSACTIONS WERE ROUTED THROUGH SEBI REGISTERED STOCK BROKER, AS THE ASSESSEE COMPANY ITSELF IS REGISTERED AS SUCH. THE TRANSACTION HAS TO BE CARRIED OUT ON A RECOGNISED STOCK EXCHANGE. THE DEFINITION OF 'RECOGNISED STOCK EXCHANGE' FOR THE PURPOSES OF THIS PROVISION IS NOT THE SAME AS UNDER THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, AND REQUIRES CERTAIN FURTHER CONDITIONS TO BE FULFI LLED. A RECOGNISED STOCK EXCHANGE IS DEFINED AS A STOCK EXCHANGE RECOGNIZED, UNDER SECTION 2(F) OF SCRA, AND WHICH FULFILS THE PRESCRIBED CONDITIONS AND WHICH IS NOTIFIED BY THE CENTRAL GOVERNMENT ACT FOR THIS PURPOSE. (RULE 6DDA) THE BOMBAY STOCK EXCHANG E LIMITED (BSE) & THE NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSE) WERE NOTIFIED AS RECOGNIZED STOCK EXCHANGES VIDE NOTIFICATION NO. 2/2006 DATED 25 - 01 - 2006 FOR THE ABOVE SAID PURPOSE IN THE CASE OF THE ASSESSEE COMPANY ALL THE DERIVATIVES TRANSACTIONS WER E CONDUCTED IN THE NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSE) THE TRANSACTION HAS TO BE SUPPORTED BY A TIME - STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER, SUB - BROKER OR OTHER INTERMEDIARY. ALL CONTRACT NOTES FOR THE TRANSACTIONS DONE BY THE ASSESSEE COMPANY BEAR THE TIME - STAMP. THE CONTRACT NOTE HAS TO INDICATE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER SCRA, SEBI ACT OR DEPOSITORIES ACT AND THE PERMANENT ACCOUNT NUMBER OF THE CLIENT. THE FORMAT OF CONTRACT NOTE TO BE ISSUED PROVIDES THE ABOVE MENTIONED DETAILS MANDATORILY. HENCE, THE ASSESSEE COMPANY HAS ALSO FULFILLED THIS CRITERIA. ACCORDINGLY, PROFIT OR LOSS DERIVED FROM TRADING IN DERIVATIVES (BE IT EITHER CURRENCY OR EQUITY) WOULD NOT BE REGARDED AS SPEC ULATIVE INCOME OR LOSS, BUT WOULD BE TREATED IN THE SAME MANNER AS ANY OTHER BUSINESS LOSS. CONSIDER ALL THESE FACTS ON MERITS ITSELF, THE LEARNED ASSESSING OFFICER OUGHT TO HAVE CONSIDERED THE TRANSACTIONS IN CURRENCY DERIVATIVES AS BUSINESS TRANSACTIONS .' 5.2 THE ASSESSEE ALSO SUBMITTED THE FOLLOWING EXTRACT FROM THE THEN HON. FINANCE MINISTER, SHRI P. CHIDAMBARAM'S SPEECH AT THE INAUGURATION PRESS CONFERENCE OF TRADING IN NSE CURRENCY DERIVATIVES AS UNDER: 'IT IS A PROUD DAY TODAY WHEN I STAND BEFORE YOU TO DEDICATE TO THE FINANCIAL SERVICES COMMUNITY A NEW PRODUCT - CURRENCY FUTURES. MAY I BEGIN WITH WARMLY THANKING THE RESERVE BANK OF INDIA (RBI) AND SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) FOR I.T.A. NO.139/MUM/2016 6 JOINTLY DEVELOPING THIS PRODUCT AND I CONGRATULATE THE NATIONAL STOCK EXCHANGE (NSE) FOR EARNING THE DISTINCTION OF BEING THE FIRST EXCHANGE TO COMMENT ITS STAKE. I WISH ALL SUCCESS TO NSE AND I AM HOPEFUL THAT THE OTHER TWO EXCHANGES, WHICH HAVE RECEIVED APPROVALS IN PRINCIPLE, AND OTHER EXCHANGES WOULD SOON OFFER THIS PRODUCT. I SEE BEFORE ME AND THE SCREEN THE FIRST TRADES {HAT HAVE BEEN PUT THROUGH - I AM NOT A TRADER AND I CANNOT QUALIFY EVER TO BECOME A TRADER BUT IF IT MAKES ANY SENSE, AS I AM SURE IT DOES TO A LARGE NUMBER OF YOU, SOMEONE IS BUYING AT 43.8250 AND SOMEONE IS SELLING AT 43.8400. I HOPE ONE OF THEM, AT LEAST, MAKES PROFIT. IN THE BUDGET SPEECH FOR 2008 - 2009, I HAD SAID, WE PROPOSE TO TAKE MEASURES TO DEVELOP THE BOND, CURRENCY AND DERIVATIVES MARKET THAT WILL INCLUDE LAUNCHING EXCHANGE TRADED CURRENCY AND INTEREST RATE FUTURES AND DEVELOPING A TRANSPARENT CREDIT DERIVATIVES MARKET WITH - APPROPRIATE SAFEGUARDS. AS YOU ARE AWARE, THE ABOVE PROPOSAL EMANATED OUT OF ONE OF THE KEY RE COMMENDATIONS OF THE HIGH POWER EXPERT COMMITTEE ON MAKI NG MUMBAI YOUR CITY OUR COMMERCIAL CAPITAL AND INTERNATIONAL FINANCIAL CENTER. THAT COMMITTEE HAD POINTED OUT THAT INDIAN INTERNATIONAL FINANCE CORPORATION (IFC) IS HANDICAPPED BY THREE KEY MARKETS THAT ARE MISSING IN INDIA'S FINANCIAL SYSTEM, NAMELY, ONE, A PROPERLY FUNCTIONING LIQUID CORPORATE AND SOVEREIGN BOND MARKET. SECONDLY, SPOT CURRENCY TRADING MARKET AN D THIRDLY, BROAD DERIVATIVES MARKETS THAT INCLUDE EXCHANGE TRADED AS WELL AS TAILORED DERIVATIVES FOR THE MANAGEMENT OF CURRENCY, INTEREST RATE AND CREDIT DEFAULT RISKS. SIMILAR RECOMMENDATIONS HAVE BEEN MADE BY OTHER COMMITTEES SUCH AS THE PATIL COMMITTEE, THE PAREKH COMMITTEE AND THE RAGHURAM RAJAN COMMITTEE. THEREFORE, THE BUDGET ANNOUNCEMENT PROPOSED ON BOND - CURRENCY - DERIVATIVES (BCD) NEXUS THE F OLLOWING. ONE LAUNCH OF EXCHANGE TRADED CURRENCY FUTURES AND THAT IS WHAT WE ARE DOING TODAY. I AM GLAD WE HAVE BEEN ABLE TO REDEEM A BUDGET PROPOSAL.' AS IS HIGHLIGHTED IN THE ABOVE SPEECH OF THE HON. FM, THE INTENT OF THE GOVERNMENT IS ALSO TO CONSIDER THE TRADING IN CURRENCY FUTURES, ON THE EXCHANGE PLATFORMS, AS PART OF DERIVATIVES TRADING FOR ALL PRACTICAL AND LEGAL PURPOSES' 5.3 THE ASSESSEE FURTHER SUBMITTED THE SEBI PERSPECTIVE OF THE CURRENCY FUTURES TRANSACTIONS AND SUBMITTED A S UNDER: 'SECTION 2(H) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (SCRA) DEFINES SECURITY AS UNDER: 2(H) 'SECURITIES' INCLUDE (I) SHARES, SCRIPS, STOCKS, BONDS, DEBENTURES, DEBENTURE STOCK OR OTHER MARKETABLE SECURITIES OF A LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR OTHER BODY CORPORATE; (IA) DERIVATIVE; .......................... (II A) SUCH OTHER INSTRUMENTS AS MAY BE DECLARED BY THE CENTRAL GOVERNMENT TO BE SECURITIES; AND (II I) RIGHTS OR INTEREST IN SECURITIES; SECTION 2(AC) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (SCRA) DEFINES DERIVATIVE AS UNDER: * '2(AC) 'DERIVATIVE' INCLUDES - I.T.A. NO.139/MUM/2016 7 (A) A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES, OF UNDERLYING SECURITIES;' HENCE, FROM THE ABOVE DEFINITION IT IS CLEAR THAT DERIVATIVES ARE SECURITIES UNDER THE SC(R)A AND HENCE THE TRADING OF DERIVATIVES IS GOVERNED BY THE REGULATORY FRAMEWORK UNDER THE SC(R)A AND SEBI, WH Y TRANSACTIONS IN CURRENCY DERIVATIVES IS A DERIVATIVE: SEBI PERSPECTIVE: SEBI WAS CONSTITUTED BY THE GOVERNMENT TO PROTECT THE INTERESTS OF THE INVESTORS IN SECURITIES AND TO PROMOTE THE DEVELOPMENT OF, AND REGULATE THE SECURITIES MARKET (FUNCT ION OF THE SEBI AS PER SECTION 11 OF THE SEBI ACT, 1992). BUT SEBI HAS ALSO BEEN REGULATING THE CURRENCY DERIVATIVES AS EVIDENT FROM THE UNDER - NOTED PRESS RELEASE / C IRCULAR - PRESS RELEASE NO. 297/2007 DATED 14.11.2007: SEBI APPROVES NEW DERIVATIVE PRODUCTS VIZ., OPTIONS & FUTURES IN SHARES AND EXCHANGE TRADED CURRENCY FUTURES & OPTIONS. SEBI/DNPD/CIRCULAR - 38/2008 DATED 06.08.2008: GUIDELINES ISSUED FOR TRADING IN EX CHANGE TRADED CURRENCY DERIVATIVES. EARLIER, THE CENTRAL GOVERNMENT HAD NOTIFIED VIDE NOTIFICATION NO. S.O. 1327 (E) DATED 22.5.09, THE MCX STOCK EXCHANGE LTD., WHICH PROVIDES INDIA - WIDE ELECTRONIC PLATFORM FOR TRADING IN CURRENCY FUTURES UNDER THE REGULATORY CONTROL OF SEBI AND RB1, AS A RE COGNIZED STOCK EXCHANGE FOR THE PURPOSE OF SECTION 43(5), CLAUSE (D). (EARLIER NOTIFICATION DATED 25.02.2006 WAS IN RESPECT OF NSE/BOMBAY STOCK EXCHANGE, WHICH DEALT IN ,INTER ALIA, IN DERIVATIVES RELATING TO SHARES AND ALSO CURRENCIES). TH EN AFTER UNITED STOCK EXCHANGE OF INDIA (USE), THE FOURTH PAN INDIA EXCHANGE, WAS LAUNCHED FOR TRADING IN FINANCIAL INSTRUMENTS IN INDIA AND RECEIVED FINAL APPROVAL FROM THE MARKET REGULATOR SEBI TO START CURRENCY FUTURES TR ADING, THE CENTRAL GOVERNMENT H AS NOTIFIED VIDE NOTIFICATION NO. 12/2011 DATED 25.2.11 THE SAID STOCK EXCHANGE ALSO AS A RECOGNIZED STOCK EXCHANGE FOR THE PURPOSE OF SECTION 43(5), CLAUSE (D) THUS THE INTENTION OF THE LEGISLATURE IS ALSO TO CONSIDER CURRENCY AS PART OF 'SECURITIES' FOR ALL PRACTICAL AND LEGAL PURPOSES.' THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE ALLOWED THE LOSS CLAIMED BY THE ASSESSEE AS BUSINESS LOSS BY HOLDING A S UNDER , VIDE APPELLATE ORDER DATED 05.10.2015 : - 6.1 I HAVE CONSIDERED THE STAND OF THE AO AS WELL AS SUBMISSIONS OF THE APPELLANT. THE ISSUE RELATES TO CLAIM OF THE APPELLANT THAT THE LOSS SUFFERED BY IT, WAS IN NORMAL COURSE OF BUSINESS WHEREAS THE AO HAS TREATED THE SAME AS SPECULATION I.T.A. NO.139/MUM/2016 8 LOSS. THE ONLY ISSU E IS OF THE TREATMENT OF CURRENCY DERIVATIVES TRANSACTIONS AS SPECULATIVE TRANSACTIONS WITHIN THE DEFINITION OF SEC. 43(5) TREATING THE SAME AS BUSINESS INCOME CONSIDERING EXPLANATION TO SECTION 43 (5) OF THE I.T. ACT, 1961. 6.2 I HAVE FURTHER GONE THROU GH THE ASSESSMENT ORDER AND DO NOT FIND THAT THE AO HAS MADE ANY ADVERSE COMMENT REGARDING ELIGIBILITY OF TRANSACTION AS DEFINED IN SECTION 43(5) EXPLANATION (I). THEREFORE, ON ISSUE OF FACT REGARDING CLAIM OF THE APPELLANT REGARDING ELIGIBILITY OF TRANSAC TIONS REMAINS UNQUESTIONED BY THE AO IN THE ASSESSMENT ORDER AND THEREFORE, THE SAID TRANSACTIONS FALL WITHIN THE PURVIEW OF THE INCOME TAX ACT, 1961 TO QUALIFY AS A NON - SPECULATIVE TRANSACTION AFTER THE AMENDMENT BY FINANCE ACT, 2005 W.E.F. 01.04.2006 WHE REIN CLAUSE (D) WAS INTRODUCED/ADDED TO SECTION 43(5) OF THE ACT. WHICH READS AS UNDER: (5) 'SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY , INCLUDING STOCKS AND SHARES , IS PERIODICAL LY 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) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COU RSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE 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 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 TRANSACTIO N IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER, (D) AN ELIGIBLE TRANSACTION IN RES PECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE [(AC)]OF SECTION 2 OF THE SECURI TIES CONTRACTS (RE GULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGES; OR (E) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNIZED ASSOCIATION WHICH IS CHARGEABLE TO COMMODITIES TRA NSACTION TAX UNDER CHAPTER VII OF THE F INANCE ACT, 2013 (17 OF 2013), SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. [EXPLANATION 1. FOR THE PURPOSES OF [CLAUSE (D)], 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 SEC URITIES 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 BA NKS 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 I.T.A. NO.139/MUM/2016 9 NOTE THE UNIQUE CLIENT IDENTI TY 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 EXC HANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECURITIES CONTRACT S (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRIBED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE;] ' 6.3 THE APPELLANT IN ITS SUBMISSIONS STATED THAT THE SAID TRANSACTIONS BY THE APPELLANT FALL WITHIN T HE EXCEPTION OF SEC. 43(5), WHEREIN ALL THE INGREDIENTS REQUIRED TO QUALIFY FOR AN EXCEPTION TO SEC. 43(5) ARE FULFILLED. THE APPELLANT HAS CONTENDED THAT IT FULFILLS ALL THE CRITERIA OF BEING GIVEN BENEFIT OF EXCEPTIONS AS PROVIDED IN SECTION 43(5) OF THE I.T. ACT, 1961.IT FULFILLS THE CRITERIA FOR THE SAME WHICH IS AS UNDER: - (A) THE TRANSACTION SHOULD BE AN ELIGIBLE TRANSACTION - >THE APPELLANT HAS CARRIED OUT THE TRANSACTIONS ELECTRONICALLY ON THE SCREEN BASED SYSTEM THROUGH SEBI REGISTERED BROKER. HE NCE, THE APPELLANT HAS SATISFIED THIS CRITERIA. (B) THE TRANSACTION SHOULD BE CARRIED OUT ON A RECOGNIZED STOCK EXCHANGE - > THE APPELLANT HAS CARRIED OUT THE TRANSACTIONS ON THE NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSE) WHICH HAS BEEN NOTIFIED BY CBDT A S A RECOGNIZED STOCK EXCHANGE VIDE NOTIFICATION NO. 02/2006 DATED 25.01.2006 AS A RECOGNIZED STOCK EXCHANGE. HENCE, THE APPELLANT HAS ALSO FULFILLED THIS CRITERIA. (C) TRANSACTION SHOULD BE IN SECURITIES AS DEFINED UNDER SECURITIES CONTRACT (REGULATION) ACT, 1956 - > THE PREAMBLE OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) ACT, 1992 STATES THAT IT IS AN' ACT TO PROVIDE FOR THE ESTABLISHMENT OF A BOARD TO PROTECT THE INTERESTS OF INVESTORS IN SECURITIES AND TO PROMOTE THE DEVELOPMENT OF, AND TO RE GULATE, THE SECURITIES MARKET AND FOR MATTERS CONNECTED THEREWITH OR INCIDENTAL THERETO.' 6.4 THE APPELLANT FURTHER REFERRED TO THE FOLLOWING : - (I) PRESS RELEASE NO. 297/2007 DATED 14.11.2007: SEBI AP PROVES NEW DERIVATIVE PRODUCTS VIZ., OPTIONS & FUTURES IN SHARES AND EXCHANGE TRADED CURRENCY FUTURES & OPTIONS. (IT) SEBI/DNPD/CIRCULAR - 38/2008 DATED 06.08.2008: GUIDELINES ISSUED FOR TRADING IN EXCHANGE TRADED CURRENCY DERIVATIVES, AS CAN BE SEEN FROM THE PREAMBLE, SEBI IS THE SOLE AUTHORITY TO R EGULATE THE TRANSACTIONS IN SECURITIES CONSIDERING THIS FACT THE AO CONCLUSION THAT CURRENCY DERIVATIVE DOES NOT FALL WITHIN THE LIMIT OF SECURITIES THAT IS NOT ACCEPTED IN THE LIMIT OF SEBI PRESS RELEASE AND PREAMBLE OF SEBI ACT. HENCE, NEEDLESS TO SAY, T RANSACTIONS IN CURRENCY DERIVATIVES BEING CONDUCTED IN RECOGNIZED STOCK EXCHANGES REGULATED BY SEBI ARE CERTAINLY SECURITIES AS DEFINED UNDER THE SECURITIES CONTRACT (REGULATION) ACT, 1956. HENCE, THE APPELLANT HAS SATISFIED THIS CRITERIA TOO. 5 CONSIDER ING THE ABOVE, IT CAN BE CONCLUDED THAT THE GAINS OR LOSS ARISING FROM THESE TRANSACTIONS ARE BUSINESS GAINS/LOSS AND NOT SPECULATIVE LOSS AS HELD BY THE A.O. IN HIS ORDER U/SEC. 143(3). IN ORDER TO SUBSTANTIATE THE CLAIM OF THE APPELLANT THE LD.AR DREW MY ATTENTION TO THE DECISION OF HON'BLE JURISDICTIONAL ITAT, MUMBAI IN THE CASE OF M/S IVF ADVISORS PVT. LTD. VS ACIT, ITA NO. 4798/MUM/2012, AY 2009 - 10, WHEREIN SIMILAR ISSUE AROSE AND THE QUESTION TO BE DECIDED WAS AS UNDER: - I.T.A. NO.139/MUM/2016 10 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) OUGHT TO HAVE HELD THAT CLAUSE (D) OF THE PROVISO TO SECTION 43(5) OF THE INCOME TAX ACT, 1961 (THE ACT) WAS APPLICABLE TO BE TRANSACTIONS IN FOREIGN CURRENCY FUTURES ENTERED INTO BY THE APPELLANT AND THEREFORE THAT THE LOSS FROM THESE TRANSACTIONS WAS NOT IN THE NATURE OF SPECULATION LOSS. THE HON'BLE LTAT VIDE ORDER DATED 13.2.2015 HAS DISCUSSED THE ABOVE ISSUE IN DEPTH AND ALLOWED THE APPEAL IN FAVOUR OF THE ASSESSEE AFTER MAK ING THE FOLLOWING OBSERVATIONS : - ' 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INVESTMENT MANAGEMENT CONSULTANT. THE RETURN FOR THE YEAR WAS FILED ON 25/09/2009 DECLARING TOTAL INCOME AT RS.NIL. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. STATUTORY NOTICES WE RE ISSUED AND SERVED UPON THE ASSESSEE, 3. WHILE PERUSING THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED A LOSS OF RS.93,63,235/ - ON ACCOUNT OF LOSS ON FOREIGN CURRENCY FUTURES. THE AO WAS OF THE STRONG BELIEF THA T THE LOSS CANNOT BE ALLOWED IN THE LIGHT OF THE PROVISIONS OF SECTION 43(5) OF THE INCOME TAX ACT, 1961 (THE ACT) R.W. CLAUSE (AC) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT 1956. WHILE DISALLOWING THE LOSS OF RS.93,63,235/ - , THE AO HAS CON SIDERED THE RELEVANT PROVISIONS OF SECTION 43(5) OF THE ACT AND SECTION 2(AC) OF THE SECURITIES CONTRACTS (REGULATION) ACT. 4. AGGRIEVED BY THIS FINDING OF THE AO THE ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A). IT WAS STRONGLY CONTENDED THAT THE CONTRAC TS IN FOREIGN CURRENCY FUTURES WERE NOT SPECULATIVE TRANSACTION, IT WAS FURTHER EXPLAINED THAT THE FOREIGN CURRENCY CONTRACT DOES NOT SATISFY THE CONDITION OF BEING A SPECULATIVE TRANSACTION AND, THEREFORE, THE LOSS ON ACCOUNT OF FOREIGN CURRENCY FUTURES W AS NOT SPECULATIVE LOSS. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, LD. CIT(A) OBSERVED THAT THE ASSESSEE IS NOT ENGAGED IN MANUFACTURING OR MERCHANTING BUSINESS AND WAS ALSO A DEALER AND INVESTOR IN STOCK AND SHARES. THEREFORE, THE LOSS OF RS.93,63, 235/ - EARNED BY THE ASSESSEE ON ACCOUNT OF TRANSACTIONS IN FOREIGN CURRENCY FUTURE WAS NOT IN THE NATURE OF HEDGING LOSS, THEREFORE, SUCH LOSS WAS NOT EARNED IN THE COURSE OF GUARDING AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATION IN RESPECT OF CONTRACTS FO R ACTUAL DELIVERY OF GOODS MANUFACTURED OR IN RESPECT OF STOCK OF SHARE ENTERED INTO BY A DEALER. LD. C1T(A) WAS OF THE FIRM BELIEF THAT PROVISO (D) TO SECTION 43(5) WAS NOT APPLICABLE. LD. CIT(A) CONFIRMED THE ASSESSMENT ORDER HOLDING THAT THE AO HAS CORR ECTLY HELD THAT SUCH LOSS WAS A SPECULATION LOSS WITHIN THE MEANING OF SECTION 43(5) OF THE ACT. AGGRIEVED BY THIS ASSESSEE IS BEFORE US. 5. LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE LOWER AUTHORITIES. LD. COUNSEL FOR THE ASSES SEE DREW OUR ATTENTION TO PROVISO (D) OF SECTION 43(5) OF THE ACT AND STATED THAT THE REVENUE AUTHORITIES HAVE FAILED TO INTERPRET THE SAID PROVISO. IT IS THE SAY OF THE LD. COUNSEL THAT THE CONTRACTS ENTERED BY THE ASSESSEE CANNOT BE SAID TO BE OF SPECULA TIVE IN NATURE BECAUSE THE CONTRACTS HAVE ULTIMATELY BEEN SETTLED BY THE DELIVERY OFFOREX. 6. PER CONTRA, LD. DR STRONGLY SUPPORTED THE ORDER OFLD. CIT(A). 7. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND THE SUBMISSIONS MADE BY THE A SSESSEE IN THE LIGHT OF THE RELEVANT PROVISIONS OF THE IT ACT AND ALSO SECURITIES CONTRACT REGULATION ACT, 1956. SECTION 43(5) OF THE LT. ACT READ AS UNDER '(5) 32''SPECULATIVE TRANSACTION' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE O F ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED33 OTHERWISE THAN BY THE ACTUAL DELIVEN/33 OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING I.T.A. NO.139/MUM/2016 11 OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE 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 HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A S TOCK 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; (OR] (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE [(AC)] OF SECTION 236 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE ;(OR] (E) AN ELIGIBLE - .TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNIZED ASS ODATION[ WHICH IS CHARGEABLE TO COMMODITIES TRANSACTION TAX UNDER CHAPTER VII OF THE FINANCE ACT, 2013 (17 OF 2013)] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. [EXPLANATION. - FOR THE PURPOSES OF THIS CLAUSE, THE EXPRESSIONS - (I) 'ELIGIBLE TRANS ACTION' 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 ACCOR DANCE 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 DIRECTI ONS 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 CONT RACT 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 SECTIO N 238 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRIBED AND NOTIFIED39 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 CHAPTER 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, REGISTE RED UNDER THE BYE - LAWS, RULES AND REGULATIONS OF THE RECOGNIZED ASSOCIATION FOR TRADING IN COMMODITY DERIVATIVE IN ACCORDANCE WITH THE PROVISIONS OF THE FORWARD CONTRACTS (REGULATION) ACT, 1952 (74 OF 1952) AND THE RULES, REGULATIONS OR BYE - LAWS MADE OR DI RECTIONS ISSUED UNDER THAT ACT ON A RECOGNIZED ASSOCIATION; AND (B) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY SUCH MEMBER OR INTERMEDIARY TO VERY CLIENT INDICATING IN THE CONTRACT NOTE, THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER TH E ACT, RULES, REGULATIONS OR BYELAWS REFERRED TO IN SUB - CLAUSE (A), UNIQUE TRADE NUMBER AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT. (HI) 'RECOGNIZED ASSOCIATION' MEANS A RECOGNIZED ASSOCIATION AS REFERRED TO IN CLAUSE (J) OF SECTION 2 OF THE FORW ARD CONTRACTS (REGULATION) ACT, 1952 (74 OF 1952) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRIBED AND IS NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE' PROVISO (D) EXCLUDES THE TRANSACTION FROM THE DEFINITION OF SPECULATIVE TRANSACTION IN RESP ECT OF TRADING OF DERIVATIVES REFERRED TO IN SECTION 2(AC) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 CARRIED IN RECOGNIZED STOCK EXCHANGE. SECTION 2(AC) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 READ AS UNDER: ' 2.[AC] 'DERIVATIVE' INCLUDES - (A) A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES, OF I.T.A. NO.139/MUM/2016 12 UNDERLYING SECURITIES;]' 7.1 THUS, . IT CAN BE SEEN THAT THE DERIVATIVES ALSO INCLUDES SECURITIES. THE DEFINITION OF ELIGIBLE TRANSACTION MENTIONED HEREIN ABOVE CLEARLY SHOW THAT THE TRANSACTION MUST HAVE BEEN CARRIED OUT ELECTRONICALLY IN ACCORDANCE WITH THE PROVIS IONS OF SECURITIES CONTRACTS (REGULATION) ACT ARID THE RULES AND REGULATIONS OR BYE LAWS MADE OR DIRECTIONS ISSUED UNDER THIS ACT OR BY BANKS OR MUTUAL FUNDS ON A RECOGNIZED STOCK EXCHANGE AND WHICH IS SUPPORTED BY TIME STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER OR SUB - BROKER OR INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER AND. PERMANENT ACCOUNT NUMBER. 7.2 IT WOULD BE PERTINENT TO CONSIDER THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF RAJS HREE SUGAR & CHEMICALS LTD. VS. AXIS BANK LTD., AIR 2011 (MAD) 144, WHEREIN THE TERM DERIVATIVE HAS BEEN DEFINED TO INCLUDE FOREIGN CURRENCY AS AN UNDERLYING SECURITY OF THE DERIVATIVE. THE RELEVANT EXTRACT OF THE CASE IS QUOTED BELOW: 'WHAT ARE THESE DERI VATIVES WHICH HAVE GAINED SUCH A GREAT DEAL OF NOTORIETY? IN SIMPLE TERMS, DERIVATIVES ARE FINANCIAL INSTRUMENTS WHOSE VALUES DEPEND ON THE VALUE OF OTHER UNDERLYING FINANCIAL INSTRUMENTS. THE INTERNATIONAL ACCOUNTING STANDARD (IAS) 39, DEFINES 'DERIVATIVE S' AS FOLLOWS: - 'A DERIVATIVE IS A FINANCIAL INSTRUMENT: (A) WHOSE VALUE CHANGES IN RESPONSE TO THE CHANGE IN A SPECIFIED INTEREST RATE, SECURITY PRICE, COMMODITY PRICE, FOREIGN EXCHANGE RATE, INDEX OF PRICES OR RATES, A CREDIT RATING OR CREDIT INDEX, OR SIMILAR VARIABLE (SOMETIMES CALLED THE 'UNDERLYING'); (B) THAT REQUIRES NO INITIAL NET INVESTMENT OR LITTLE INITIAL NET INVESTMENT RELATIVE TO OTHER TYPES OF CONTRACTS THAT HAVE A SIMILAR RESPONSE TO CHANGES IN MARKET CONDITIONS; AND (C) THAT IS SETTLED AT A FUTURE DATE.' ACTUALLY, DERIVATIVES ARE ASSETS, WHOSE VALUES ARE DERIVED FROM VALUES OF UNDERLYING ASSETS. THESE UNDERLYING ASSETS CAN BE COMMODITIES, METALS, ENERGY RESOURCES, AND FINANCIAL ASSETS SUCH AS SHARES, BONDS, AND FOREIGN CURRENCIES.' 7.3 FUR THER, THE SEBI WEBSITE IN ITS SECTION 'FREQUENTLY ASKED QUESTIONS' HAS EXPLAINED THE MEANING OF DERIVATIVE AS UNDER: Q 1. WHAT ARE DERIVATIVES? A. THE TERM 'DERIVATIVE' INDICATES THAT IT HAS NO INDEPENDENT VALUE, I.E. ITS VALUE IS ENTIRELY 'DERIVED' FROM T HE VALUE OF THE UNDERLYING ASSET. THE UNDERLYING ASSET CAN BE SECURITIES, COMMODITIES, BULLION, CURRENCY, LIVE STOCK OR ANYTHING ELSE. IN OTHER WORDS, DERIVATIVE MEANS A FORWARD, FUTURE OPTION OR ANY OTHER HYBRID CONTRACT OF THE DETERMINED FIXED DURATION, LINKED FOR THE PURPOSE OF CONTRACT FULFILLMENT TO THE VALUE OF A SPECIFIED REAL OR FINANCIAL ASSET DR TO AN INDEX OF SECURITIES. WITH SECURITIES LAWS (SECOND AMENDMENT) ACT,1999, DERIVATIVES HAS BEEN INCLUDED IN THE DEFINITION, OF SECURITIES. THE TERM DERI VATIVE HAS BEEN DEFINED IN SECURITIES CONTRACTS (REGULATIONS) ACT, AS: A DERIVATIVE INCLUDES: - A. A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURI TY; B. A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES, OF UNDERLYING SECURITIES; IT IS FURTHER PROVIDED BY SEBI THAT IN AUG.2008 SEBI PERMITTED EXCHANGE TRADED CURRENCY DERIVATIVE. 7.4 CONSIDERING THE RELEVANT PROVISIONS OF THE RELE VANT ACTS, DISCUSSED HEREIN ABOVE IN THE LIGHT OF HON'BLE MADRAS HIGH COURT AND THE ANSWERS GIVEN TO FREQUENTLY ASKED QUESTIONS BY THE SEBI AND THE INCORPORATION OF EXCHANGE TRADED CURRENCY DERIVATIVE FROM AUGUST, 2008, THERE REMAIN NO IOTA OF DOUBT THAT T HE TRANSACTION OF THE ASSESSEE CANNOT BE TREATED AS SPECULATIVE TRANSACTION. WE HAVE ALSO GONE THROUGH THE COPIES OF THE CONTRACT NOTES INCORPORATED IN THE PAPER BOOK FILED BEFORE US. A PERUSAL OF THE CONTRACT NOTE SHOWS THAT THE ASSESSEE HAS EITHER ENTERE D INTO CALL OPTION OR PUT OPTION AND ON THE SETTLEMENT DAY THE TRANSACTION HAS BEEN SETTLED BY DELIVERY, EITHER THE ASSESSEE HAS PAID US DOLLAR ON THE SETTLEMENT DAY OR HAS TAKEN DELIVERY OF US DOLLAR. 7.5 TO SUM UP, THE DERIVATIVES INCLUDE FOREIGN CURRENC Y AND CALL OPTION/ PUT OPTION, ARE TRANSACTIONS OF DERIVATIVE MARKETS AND CANNOT BE TERMED AS SPECULATIVE IN NATURE. CONSIDERING THE TOTALITY OF THE FACTS AND IN I.T.A. NO.139/MUM/2016 13 THE LIGHT OF THE JUDICIAL DISCUSSION HEREIN ABOVE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF LD. CIT(A). APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED, 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED.' 6 THUS, IT CAN BE CONCLUDED THAT IN THE PRESENT CASE WHERE THE AO HAS NOT RAISED ANY CONCERN ABOUT ELIGIBILITY OF TR ANSACTION TO BE TAKEN INTO CONSIDERATION FOR BEING A NON - SPECULATIVE IN NATURE AND WHERE THE APPELLANT HAS CLAIMED THAT THE LOSS INCURRED BY THE APPELLANT WAS ON TRANSACTIONS CARRIED OUT ON THE RECOGNIZED STOCK EXCHANGE AND THE TRANSACTION WAS CARRIED OUT ELECTRONICALLY ON SCREEN BASED SYSTEM, AND THE FACT THAT AFTER THE AMENDMENT IN I.T, ACT BY FINANCE ACT, 2005, THE PRESENT TRANSACTIONS ARE SQUARELY COVERED UNDER EXCEPTIONAL CLAUSE 43 (5) (D) READ WITH 43(5)(I) OF THE I.T. ACT, 1961, THE CLAIM OF THE APPE LLANT CANNOT BE NEGATED FOR THE SIMPLE REASON AS MENTIONED BY THE AO IN THE ASSESSMENT ORDER. IN FACT IT SEEMS THE AO HAS GOT CONFUSED BECAUSE OF THE CONCEPT. THE AO HAS FAILED TO APPRECIATE THAT THE APPELLANT HAS CARRIED OUT TRANSACTIONS IN DERIVATIVES ON THE RECOGNIZED STOCK EXCHANGE. THE DERIVATIVES CAN BE IN SHARES AND SECURITIES AS WELL AS CURRENCY TOO. DERIVATE MARKET ON THE STOCK EXCHANGE IS NOT LIMITED ONLY TO SHARES AND STOCKS. 6.6.2 IN THIS REGARD REFERENCE IS MADE TO THE CASE OF M/S RAJSHREE SUG ARS & CHEMICALS LTD. VS M/S AXIS BANK LIMITED IN O.A. NOS.251 AND 252 OF 2008 IN CS.NO.240 OF 2008, O.A. NOS.526 AND 527 OF 2008 IN C.S. NO.240 OF 2008, A. NOS.1926, 1927, 2446 AND 2447 OF 2008 IN C.S. NO.240 OF 2008 WHEREIN THE HON'BLE MADRAS HIGH COURT I N ITS JUDGEMENT DATED 14, OCT, 2008 HAS OBSERVED AS UNDER : 'IN SIMPLE TERMS, DERIVATIVES ARE FINANCIAL INSTRUMENTS WHOSE VALUES DEPEND ON THE VALUE OF OTHER UNDERLYING FINANCIAL INSTRUMENTS. THE INTERNATIONAL ACCOUNTING STANDARD (IAS) 39, DEFINES 'DERIVA TIVES' AS FOLLOWS - 'A DERIVATIVE IS A FINANCIAL INSTRUMENT: (A) WHOSE VALUE CHANGES IN RESPONSE TO THE CHANGE IN A SPECIFIED INTEREST RATE, SECURITY PRICE, COMMODITY PRICE, FOREIGN EXCHANGE RATE, INDEX OF PRICES OR RATES, A CREDIT RATING OR CREDIT INDEX, OR SIMILAR VARIABLE (SOMETIMES CALLED THE 'UNDERLYING1); (B) THAT REQUIRES NO INITIAL NET INVESTMENT OR LITTLE INITIAL NET INVESTMENT RELATIVE TO OTHER TYPES OF CONTRACTS THAT HAVE A SIMILAR RESPONSE TO CHANGES IN MARKET CONDITIONS; AND (C) THAT IS SETT LED AT A FUTURE DATE. ' ACTUALLY, DERIVATIVES TARE ASSETS, WHOSE VALUES ARE DERIVED FROM VALUES OF UNDERLYING ASSETS. THESE UNDERLYING ASSETS CAN BE COMMODITIES, METALS, ENERGY RESOURCES, AND FINANCIAL ASSETS SUCH AS SHARES, BONDS, AND THUS, IN VIEW OF THE ABOVE, THERE SHOULD NOT BE ANY CONFUSION AS TO WHETHER 'CURRENCY FUTURES' IS ART OF THE TERM 'DERIVATIVE' AS DEFINED IN SECTION 2(AC) OF SCRA, BECAUSE THE DEFINITION OF 'DERIVATIVE' IN SECTION 2(AC) OF SCRA IS AN INCLUSIVE DEFINITION, WHICH MEANS THAT ANY OTHER ITEM CONFORMING TO THE GIVEN CHARACTERISTICS WILL ALSO QUALIFY TO BE A 'DERIVATIVE' TRANSACTION. IN FACT SEBI WAS CONSTITUTED BY THE GOVERNMENT TO PROTECT THE INTERESTS OF THE INVESTORS IN SECURITIES AND TO PROMOTE THE DEVELOPMENT OF, AND REGULAT E THE SECURITIES MARKET (SEE FUNCTION OF THE SEBI AS PER SECTION 11 OF THE SEBI ACT, 1992) AND SEBI HAS ALSO BEEN REGULATING THE CURRENCY DERIVATIVES AS EVIDENT FROM THE ABOVE REFERRED PRESS RELEASE / CIRCULARS. IN FACT, EARLIER, THE CENTRAL GOVERNMEN T HAD NOTIFIED VIDE NOTIFICATION NO. S.O. 1327 (E) DATED 22.5.09, THE MCX STOCK EXCHANGE LTD., WHICH PROVIDES INDIA - WIDE ELECTRONIC PLATFORM FOR TRADING IN CURRENCY FUTURES UNDER THE REGULATORY CONTROL OF SEBI AND RBI, AS A RECOGNIZED STOCK EXCHANGE FOR THE PURPOSE OF SECTION 43(5), CLAUSE I.T.A. NO.139/MUM/2016 14 (D). (EARLIER NOTIFICATION DATED 25.01.2006 WAS IN RESPECT OF NSE / BOMBAY STOCK EXCHANGE, WHICH DEALT IN ,INTER ALIA, IN DERIVATIVES RELATING TO SHARES AND ALSO CURRENCIES). THEN AFTER UNITED STOCK EXCHANGE OF INDIA (USE), THE FOURTH PAN INDIA EXCHANGE, WAS LAUNCHED FOR TRADING IN FINANCIAL INSTRUMENTS IN INDIA AND RECEIVED FINAL APPROVAL FROM THE MARKET REGULATOR SEBI TO START CURRENCY FUTURES TRADING, THE CENTRAL GOVERNMENT HAS NOTIFIED VIDE NOTIFICATION NO. 12/2011 DATED 25.2.11THE SAID STOCK EXCHANGE ALSO AS A RECOGNIZED STOCK EXCHANGE FOR THE PURPOSE OF SECTION 43(5), CLAUSE (D). IT IS WORTH NOTING THAT MCX STOCK EXCHANGE LTD. (MCX - SX) SHOULD NOT BE MIXED - UP WITH THE MULTI COMMODITY EXCHANGE OF INDIA LTD., WHICH IS CURRENTLY PROVIDING A PLATFORM FOR TRADING IN COMMODITIES ONLY. COMMODITY DERIVATIVES ARE SO FAR OUTSIDE THE AMBIT OF SEC 43(5), CLAUSE (D). IN VIEW OF THE ABOVE DISCUSSION, IT CAN BE CONCLUDED THAT 'FUTURES TRANSACTIONS IN CURRENCIES TRADED IN THE TRA DING PLATFORM OF THE FOUR RECOGNIZED STOCK EXCHANGES VIZ., NATIONAL STOCK EXCHANGE, BOMBAY STOCK EXCHANGE, MCX STOCK EXCHANGE AND UNITED STOCK EXCHANGE OF INDIA ARE BUSINESS TRANSACTIONS AND NOT SPECULATIVE TRANSACTIONS AND LOSS ARISING THERE FROM CAN BE A DJUSTED AGAINST ANY OTHER BUSINESS INCOME INCLUDING SPECULATIVE INCOME. 6.6.3 TO SUM UP, KEEPING IN VIEW THE ABOVE FACTS, JUDICIAL PRONOUNCEMENTS AND OTHER REFERENCES, IT CAN BE CONCLUDED THAT THE APPELLANT'S CLAIM FALLS WITHIN THE PURVIEW OF DERIVATIVE TRANSACTION AND THE LOSS IS TO BE ALLOWED SINCE IT IS ON SCREEN BASED SYSTEM ON RECOGNIZED STOCK EXCHANGE AND THE TRANSACTIONS ARE ELIGIBLE TRANSACTIONS WITHIN THE MEANING OF EXCEPTIONS TO SECTION 43(5). THIS VIEW IS FURTHER STRENGTHENED BY THE HON'BLE ITA T OF MUMBAI WHICH IS A JURISDICTIONAL IT AT AND WHICH IS BINDING IN SO FAR AS MUMBAI CHARGE IS CONCERNED. 6.6.4 IN FACT, SEBI, MUMBAI'S CIRCULAR AND PRESS RELEASE DATED 14.11.2007 QUITE LONG BACK MADE IT VERY CLEAR THAT THE FOREIGN EXCHANGE CURRENCY IS ALSO A PART OF DERIVATIVES IN F &O. 3T HE SAME IS REPRODUCED HERE AS UNDER : - SEBI BOARD APPROVES NEW DERIVATIVE PRODUCTS AS A STEP INTENDED TO PROGRESSIVELY ENCOURAGE MARKETS TO MOVE ONSHORE, THE SEBI BOARD, IN PRINCIPLE, APPROVED INTRODUCTION OF NEW DERIVATIVE PRODUCTS FOR THE INDIAN MARKET BASED ON THE INTERIM RECOMMENDATIONS MADE BY THE SEBI COMMITTEE ON DERIVATIVES HEADED BY PROF. M.RAMMOHAN RAO. THE PRODUCTS WILL BE INTRODUCED UNDER SUITABLE REGULATORY FRAMEWORK IN DUE CONSULTATION WHEREVER N ECESSARY WITH OTHER REGULATORY AUTHORITIES. THESE NEW DERIVATIVE PRODUCTS WILL BE RELATING TO: (1) MINI - CONTRACTS ON EQUITY INDICES, (2) OPTIONS WITH LONGER LIFE/TENURE, (3) VOLATILITY INDEX ANDF&O CONTRACTS, (4) OPTIONS ON FUTURES, (5) BOND INDICE S AND F&O CONTRACTS, (6) EXCHANGE - TRADED CURRENCY (FOREIGN EXCHANGE) FUTURES & OPTIONS, AND (7) INTRODUCTION OF EXCHANGE - TRADED PRODUCTS TO CATER TO DIFFERENT INVESTMENT STRATEGIES. I.T.A. NO.139/MUM/2016 15 IT IS EXPECTED THAT THESE NEW DERIVATIVE PRODUCTS WILL PROVIDE INVESTO RS WITH A LARGER RANGE OF RISK MITIGATION PRODUCTS AND CREATE MORE ACTIVITY IN THE INDIAN ONSHORE MARKETS. THESE PRODUCTS ARE ALSO EXPECTED TO BRING TRANSACTIONS BASED ON PRIVATE - SYNTHETIC PRODUCTS TO AN EXCHANGE - TRADED TRANSPARENT MECHANISM WITH APPROPRIA TE REGULATORY SUPERVISION.' FURTHER, SEBI VIDE CIRCULAR NO.SEBI/DNPD/CIR.38/2008 DATED 06.08.2008 HAD MADE THE FOLLOWING REFERENCES WITH REFERENCE TO DERIVATIVES IN CURRENCY. 'GENERAL MANAGER DERIVATIVES AND NEW PRODUCTS DEPARTMENT SEBI/DNPD/CIR - 38/2008 AUGUST 06, 2008 TO, RECOGNIZED STOCK EXCHANGES AND THEIR CLEARING CORPORATIONS/ CLEARING HOUSES, CLEARING MEMBERS AND TRADING MEMBERS SUB; EXCHANGE TRADED CURRENCY DERIVATIVES A RBI - SEBI STANDING TECHNICAL COMMITTEE ('COMMITTEE') WAS CONSTITUTED TO EVOLVE NORMS AND OVERSEE IMPLEMENTATION OF EXCHANGE TRADED CURRENCY AND INTEREST RATE DERIVATIVES. TO BEGIN WITH, THE COMMITTEE HAS LOOKED AT EXCHANGE TRADED CURRENCY DERIVATIVES AND SUBMITTED A REPORT ON EXCHANGE TRADED CURRENCY FUTURES ('REPORT'). THE REPORT, WHICH WAS SUBMITTED ON MAY 29, 2008, IS ALSO AVAILABLE ON THE SEBI WEBSITE WWW .SEBI.GOV.IN. THE REPORT LAYS DOWN THE FRAMEWORK FOR THE LAUNCH OF EXCHANGE TRADED CURRENCY FUTUR ES IN TERMS OF THE ELIGIBILITY NORMS FOR EXISTING AND NEW EXCHANGES AND THEIR CLEARING CORPORATIONS/HOUSES, ELIGIBILITY CRITERIA FOR MEMBERS OF SUCH EXCHANGES/CLEARING CORPORATIONS/HOUSES, PRODUCT DESIGN, RISK MANAGEMENT MEASURES, SURVEILLANCE MECHANISM AN D OTHER RELATED ISSUES. EXCHANGE TRADED CURRENCY DERIVATIVES FOR TRADING IN EXCHANGE TRADED CURRENCY DERIVATIVES, RECOGNIZED STOCK EXCHANGES AND THEIR CLEARING CORPORATIONS / CLEARING HOUSES, CLEARING MEMBERS AND TRADING MEMBERS HAVE TO COMPLY WITH THE FOLLOWING: EXCHANGE: A RECOGNIZED STOCK EXCHANGE FULFILLING THE CONDITIONS MENTIONED UNDER PARAS 5.1 AND 5.2 OF THE REPORT MAY APPLY TO SEBI FOR GRANT OF APPROVAL FOR STARTING TRADING IN CURRENCY DERIVATIVES. THE APPLICATION SHALL BE ACCOMPANIED BY THE DETAILS PERTAINING TO THE DERIVATIVES PRODUCT PROPOSED TO BE INTRODUCED (MENTIONED UNDER PARA 7.2 OF THE REPORT), THE PROPOSED BYE - LAWS OF THE EXCHANGE/CLEARING CORPORATION / CLEARING HOUSE AND THE MODEL DOCUMENTS FOR CURRENCY DERIVATIVES SEGMENT (IN ACCOR DANCE WITH PARA 7.1 OF REPORT). FURTHER, A RECOGNIZED STOCK EXCHANGE SHALL ENSURE THAT; A. CHAPTER 2 OF THE REPORT ON PRODUCT DESIGN IS COMPLIED WITH. IN ADDITION, THE LAST DAY FOR TRADING OF THE CONTRACT SHALL BE TWO WORKING DAYS PRIOR TO THE FINAL S ETTLEMENT I.T.A. NO.139/MUM/2016 16 DAY, WITH THE SETTLEMENT PRICE ON THE LAST TRADING DAY BEING THE RESERVE BANK'S REFERENCE RATE ON THAT DATE. B. CHAPTER 4 OF THE REPORT ON SURVEILLANCE AND DISCLOSURES IS COMPLIED WITH. C. MEMBERSHIP OF THE CURRENCY DERIVATIVES SEG MENT IS SEPARATE FROM THE MEMBERSHIP OF THE OTHER SEGMENTS OF THE EXCHANGE AS MENTIONED UNDER PARA 6.1 OF THE REPORT, D. APPROPRIATE MECHANISMS PREVENTING PARTICIPATION OF 'PERSONS RESIDENT OUTSIDE INDIA' AS DEFINED IN SECTION 2(W) OF THE FOREIGN EXCHANGE MANAGEMENT ACT,1999 IN EXCHANGE TRADED CURRENCY DERIVATIVES BE PUT IN PLACE. 2. CLEARING CORPORATION / CLEARING HOUSE: CLEARING CORPORATION/CLEARING HOUSE FULFILLING THE CONDITIONS MENTIONED UNDER PARAS 5.3 AND 5,4 OF THE REPORT MAY AP PLY TO SEBI FOR GRANT OF APPROVAL FOR UNDERTAKING CLEARING AND SETTLEMENT RELATED TO TRADES IN CURRENCY DERIVATIVES. THE CLEARING CORPORATION / CLEARING HOUSE SHALL COMPLY WITH THE RISK MANAGEMENT MEASURES DETAILED UNDER CHAPTER 3 OF THE REPORT. 3. AFT ER OBTAINING SEBI'S APPROVAL, THE RECOGNIZED STOCK EXCHANGE AND ITS CLEARING CORPORATION / CLEARING HOUSE SHALL MAKE AN APPLICATION TO RBI TO OBTAIN PERMISSION UNDER FEMA FOR TRADING, CLEARING AND SETTLEMENT OF CURRENCY DERIVATIVES. 4. CLEARING MEMBER AND TRADING MEMBER: A PERSON DESIROUS OF BECOMING A CLEARING MEMBER AND /OR A TRADING MEMBER AND FULFILLING THE CONDITIONS DETAILED UNDER PARAS 6.2 AND 6.3 OF THE REPORT MAY APPLY TO SEE I FOR REGISTRATION UNDER SEBI (STOCK BROKERS AND SUB - BROKERS) (AMEND MENT) REGULATIONS, 2008. II. PARTICIPA TION OF BANKS TO ENABLE BANKS TO BECOME CLEARING MEMBER AND / OR TRADING MEMBER OF THE CURRENCY DERIVATIVES SEGMENT OF AN EXCHANGE, AN EXCHANGE SHALL AMEND ITS BYE - LAWS, AS UNDER: 1. 'ANY BANK, - INCLUDED IN TH E SECOND SCHEDULE TO THE RESERVE BANK OF INDIA ACT, 1934, AND SPECIFICALLY AUTHORIZED BY RBI FOR THIS PURPOSE, I. IS ELIGIBLE TO BECOME CLEARING MEMBER AND/OR TRADING MEMBER OF THE CURRENCY DERIVATIVES SEGMENT OF AN EXCHANGE, ON THE RECOMMENDATIO N OF THE GOVERNING BODY OF THE EXCHANGE. . II. SUCH BANK CAN ACT AS MEMBER FOR THEIR PROPRIETARY DEALINGS, TO ACT ON THEIR OWN ACCOUNT, IN THE CURRENCY DERIVATIVES SEGMENT OF THE EXCHANGE. III. SUCH BANK CAN ALSO ACT AS MEMBER OR AN AGENT F OR ANY OTHER PERSON, CLIENT OR CUSTOMER IN THE CURRENCY DERIVATIVES SEGMENT OF AN EXCHANGE. IV. SUCH BANK SHALL ABIDE BY CIRCULARS AND DIRECTIONS ISSUED BY RBI AND SEBI IN RESPECT OF DEALING OF SUCH BANKS IN THE EXCHANGE.' 6.6.5 THE PRESENT YEAR IS A.Y.2012 - 13 AND THE APPELLANT'S CLAIM FOR CURRENCY DERIVATIVE IS SUBSEQUENT TO THE ISSUANCE OF SEBI CIRCULAR AND THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S RAJSHREE SUGARS & CHEMICALS LTD. VS M/S AXIS I.T.A. NO.139/MUM/2016 17 BANK LIMITED. HENCE, THE INCLUSION O F EXCHANGE TRADING CURRENCY IN THE AMBIT OF DERIVATIVES CANNOT BE NEGATED. IN VIEW OF THE ABOVE, THE APPELLANT'S CLAIM REGARDING LOSS IN CURRENCY DERIVATIVE TRANSACTION IS ACCEPTED AND THE AO IS DIRECTED TO TREAT THE ABOVE REFERRED LOSS AS BUSINESS LOSS AND DELETE THE DISALLOWANCES OF RS.5,44,52,507/ - WHICH HAS BEEN TREATED AS SPECULATIVE LOSS. IN THE RESULT, THE APPELLANT'S CLAIM ON THIS ISSUE IS ALLOWED. 5 . AGGRIEVED BY THE DECISION OF LEARNED CIT(A) VIDE APPELLATE ORDER DATED 05 - 10 - 2015 , T HE R EVE NUE HAS COME IN AN APPEAL BEFORE THE TRIBUNAL . THE LD. DR SUBMITTED THAT FOREIGN CUR RENCY IS NOT SECURITY AS DEFINED UNDER SCRA AND HENCE LOSS SUFFERED IS NOT A BUSINESS LOSS RATHER IT IS A SPECULATIVE LOSS. IT WAS SUBMITTED BY LEARNED DR THAT FOREIGN CURRENCY IS NOT DERIVATIVE TO BE ENTITLED TO BE ALLOWED AS BUSINESS LOSS WITHIN MEANING OF SECTION 43(5) OF THE 1961 ACT . W HILE ON THE OTHER HAND THE LD. AR RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF IVF ADVISORS PVT. LTD. V. ACIT, ITA NO. 479 8/MUM/2012, AY 2009 - 10 AND DECISION IN THE CASE OF RAJSHR EE SUGAR & CHEMICALS LTD. V . AXIS BANK LTD., AIR 2011 (MAD) 144 . H E ALSO RELIED UPON THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF ACIT V. M/S EDELWEISS GLOBAL WEALTH MANAGEMENT LTD IN ITA NO. 366/ MUM/2016 WHEREIN TRIBUNAL VIDE ORDERS DATED 24.11.2017 , HELD AS UNDER: - THIS IS AN APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD.CIT(A) - 8, MUMBAI, DATED 30.11.2015 FOR THE ASSESSMENT YEAR 2010 - 11. 2. THE ONLY ISSUE RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION OF RS.5,16,74,976/ - BY THE LD. CIT(A) AS MADE BY THE AO BY TREATING THE LOSS ON TRADING IN CURRENCY DERIVATIVE INSTRUMENTS AS SPECULATION LOSS. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN TH E BUSINESS OF MARKETING AND DISTRIBUTION OF FINANCIAL PRODUCTS AND ADVISORY SERVICES AND FILED RETURN OF INCOME ON 4.10.2010 DECLARING TOTAL LOSS OF RS.89,03,783/ - UNDER NORMAL PROVISIONS OF LAW AND UNDER SECTION 115JB AT RS.1,08,60,745/ - . DURING THE ASSES SMENT YEAR RELEVANT TO THE PREVIOUS YEAR UNDER CONSIDERATION, THE ASSESSEE HAS CLAIMED SET OFF OF LOSS IN TRADING IN CURRENCY DERIVATIVE INSTRUMENTS OF RS.5,16,74,976/ - AGAINST THE BUSINESS INCOME EARNED. HOWEVER, THE AO WAS OF THE OPINION THAT LOSS IN TRA DING IN CURRENCY DERIVATIVES IS NOT SPECULATIVE AND HENCE NOT ELIGIBLE FOR SETTING OFF AGAINST THE NORMAL BUSINESS LOSS. THE ASSESSEE FILED DETAILED REPLY BEFORE THE AO. THE AO IS NOT SATISFIED WITH THE REPLY OF THE ASSESSEE AND TREATED THE SAID LOSS AS SP ECULATIVE IN NATURE AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE DENYING THE BENEFIT OF SET OFF OF RS.4,90,23,770/ - VIDE ASSESSMENT ORDER DATED 18.2.2013 PASSED UNDER SECTION 143(3) OF THE ACT. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE AFTER CONSIDERING THE CONTENTIONS AND SUBMISSIONS RAISED DURING THE COURSE OF APPELLATE PROCEEDINGS WHICH HAVE BEEN INCORPORATED IN PARA 4.2 I.T.A. NO.139/MUM/2016 18 TO 4.10 OF THE APPELLATE ORDER AND DELETED THE ADDITION MADE BY THE AO BY OBSERVING AND HOLDING AS UNDER : 6. DECISION GROUND NO.1 AND 4 6.1 I HAVE GIVEN DUE CONSIDERATION TO THE FACTS OF THE CASE. AT THE OUTSET, IT IS PERTINENT TO NOTE THAT THE FACTS OF THIS CASE ARE IDENTICAL TO THOSE IN THE CASE OF IVF ADVISORS PVT LTD. ITA NO.4798 /MUM/2012 DATED 13.2.2015 WHEREIN THE HONBLE ITATI BENCH MUMBAI HAS HELD AS UNDER : 7.4 CONSIDERING THE RELEVANT PROVISIONS OF THE RELEVANT ACTS, DISCUSSED HEREIN ABOVE IN THE LIGHT OF HONBLE MADRAS HIGH COURT AND THE ANSWERS GIVEN TO FREQUENTLY ASKE D QUESTIONS BY THE SEBI AND THE INCORPORATION OF EXCHANGE TRADED CURRENCY DERIVATIVE FROM AUGUST, 2008, THERE REMAIN NO IOTA OF DOUBT THAT THE TRANSACTION OF THE ASSESSEE CANNOT BE TREATED AS SPECULATIVE TRANSACTION. WE HAVE ALSO GONE THROUGH THE COPIES OF THE CONTRACT NOTES INCORPORATED IN THE PAPER BOOK FILED BEFORE US. A PERUSAL OF THE CONTRACT NOTE SHOWS THAT THE ASSESSEE HAS EITHER ENTERED INTO CALL OPTION OR PUT OPTION AND ON THE SETTLEMENT DAY THE TRANSACTION HAS BEEN SETTLED BY DELIVERY, EITHER THE ASSESSEE HAS PAID US DOLLAR ON THE SETTLEMENT DAY OR HAS TAKEN DELIVERY OF US DOLLAR 7.5 TO SUM UP, THE DERIVATIVES INCLUDE FOREIGN CURRENCY AND CALL OPTION/ PUT OPTION, ARE TRANSACTIONS OF DERIVATIVE MARKETS AND CANNOT BE TERMED AS SPECULATIVE IN NATURE . CONSIDERING THE TOTALITY OF THE FACTS AND IN THE LIGHT OF THE JUDICIAL DISCUSSION HEREIN ABOVE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF LD. CIT(A). APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 6.2 FURTHER CBDT, IN ITS INSTRUCTION NO.3/2010 DATED 23.3.2010 GUIDED THE AO TO VERIFY THE LOSS ON ACCOUNT OF CURRENCY DERIVATIVES AND ITS NATURE (WHETHER SPECULATIVE OR NON - SPECULATIVE). THE CBDTS INSTRUCT9ION IS QUOTED AT PARA 4.9 ABOVE AND DISCUSSED THEREIN. 6.3 AS CAN BE SEEN FROM THE FACTS OF THE INSTANT CASE, THE ISSUES INVOLVED AND CIRCUMSTANCES TO BE EXAMINED ARE IDENTICAL TO THOSE WHICH WERE BEFORE THE HONBLE ITAT IN IS DECISION IN ITAT ORDER NO.4798/MUM/2012 DATED 13.2.2015 WHICH HAS BEEN EXTENSIVELY REFERRED TO ABOVE, IN VIEW OF THE ABOVE FACTS AND CBDTS INSTRUCTION NO.3/2010 DATED 23.3.2010 THE RATIO LAID DOWN BY THE HONBLE ITAT HAS TO BE RESPECTFULLY FOLLOWED. 6.4 ACCORDINGLY, GROUNDS OF APPEAL 1 TO 4 ARE ALLOWED AND THE AO IS DIRECTED TO DELETE THE ADDITION OF RS.5,79,27,5 53/ - ON ACCOUNT OF SPECULATION LOSS. GROUNDS NO.1 TO 4 ARE ALLOWED . 6.5 GROUNDS 5 AND 6 REFERS TO DISALLOWANCE OF RS.62,52,577/ - BEING LOSS INCURRED IN TRADING OF COMMODITY DERIVATIVES TREATING THE SAME AS SPECULATIVE LOSS. 6.6 IT IS SEEN THAT THE AO HAS TREATED THE COMMODITY DERIVATIVE LOSS AS SPECULATIVE LOSS DESPITE THE FACT THAT THE APPELLANT ITSELF HAS TREATED THE SAID LOSS AS SPECULATIVE I.T.A. NO.139/MUM/2016 19 LOSS AND DISALLOWED HE SAME, HOWEVER, THE SAME HAS NOT BEEN SET OFF AGAINST THE SPE CULATIVE INCOME BY THE AO AND RESULTANTLY THE SPECULATIVE INCOME HAS BEEN ASSESSED AT RS.1,36,29,223/ - . THIS TRANSLATES TO DOUBLE TAXATION. 6.7 THE AO IS DIRECTED TO GIVE BENEFIT OF SET OFF OF SPECULATIVE LOSS OF RS.62,68,501/ - AGAINST SPECULATIVE INCOME DECLARED IN THE RETURN OF INCOME. GROUND NO.5 AND 6 ARE ALLOWED 4. THE LD. DR ARGUED BEFORE US THAT THE LOSS ON TRADING IN FOREIGN EXCHANGE IS NOT A BUSINESS LOSS BUT IT IS SPECULATIVE LOSS AND THEREFORE THE AO HAS RIGHTLY DENIED THE SETTING OFF THE SA ID LOSS AGAINST THE NORMAL BUSINESS INCOME. THE LD. AR ON THE CONTRARY SUBMITTED THAT THE EXPLANATION TO SECTION 73 DOES NOT APPLY TO THE TRADING IN FOREIGN EXCHANGE AND IS APPLICABLE ONLY TO TRADING IN SHARES AND SECURITIES. THE LD. AR ALSO SUBMITTED THAT NATIONAL STOCK EXCHANGE AND MCX STOCK EXCHANGE HAVE BEEN NOTIFIED AS RECOGNIZED STOCK EXCHANGES WITH EFFECT FROM 22.5.2009 IN THE GAZETTE OF INDIA. HE ALSO PLACED A COPY OF THE NOTIFICATION ISSUED BY THE CBDT NOTIFYING THESE EXCHANGES AS RECOGNIZED STOCK EXCHANGES. THE LD AR STATED THAT IN VIEW OF THE SAID FACTS , THE TRANSACTIONS CARRIED OUT ON THE SAID EXCHANGES ARE NOT SPECULATIVE TRANSACTION. HE FURTHER SUBMITTED THAT ALL CONDITIONS AS ENVISAGED IN SECTION 43(5)(D) OF THE ACT HAVE BEEN SATISFIED AND HE NCE SHOULD BE ALLOWED TO BE SET OFF AGAINST THE NORMAL BUSINESS INCOME. THE LD. AR ALSO DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 43(5) OF THE ACT AS AMENDED BY THE FINANCE ACT, 2005 IN WHICH CLAUSE (D) WAS INSERTED IN THE PROVISO TO SUB - SECTION (5) OF SECTION 43 OF THE INCOME TAX ACT, 1961) DATED 1.4.2006 DEFINING THE ELIGIBLE TRANSACTIONS IN RESPECT OF TRADING IN DERIVATIVES AS REFERRED TO SECTION 2 OF SECURITIES TRANSACTION ACT, 1956 CARRIED OUT IN RECOGNIZED STOCK EXCHANGES SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTIONS AND ACCORDINGLY, HE SUBMITTED THAT ANY TRADING/TRANSACTIONS CARRIED OUT IN THE RECOGNISED STOCK EXCHANGE WITH EFFECT FROM 1.4.2006 WERE TO BE TREATED AS NON SPECULATIVE TRANSACTIONS. FINALLY, THE LD. AR PRAYED BEFORE THE BENCH THAT THE ORDER OF LD. CIT(A) BE UPHELD AND THE AO BE DIRECTED TO ALLOW LOSS IN FOREIGN EXCHANGE TRANSACTION AS BUSINESS LOSS. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE IMPUGNED ORDERS AND CIRCULAR OF CBDT (SUPRA). WE FIND THAT THE TRANSACTIONS OF TRADING IN FOREIGN EXCHANGE INSTRUMENTS ON RECOGNIZED STOCK EXCHANGE ARE NOT SPECULATIVE TRANSACTIONS IN VIEW OF THE AMENDMENT BY FINANCE ACT, 2005 IN SECTION 43(5) OF THE IT ACT, WHEREIN THE PROVISO HAS BEEN INSERTED W.E.F.1.4.2006 PROVIDING THAT ANY TRANSACTION ON RECOGNIZED STOCK EXCHANGE IN DERIVATIVES WOULD NOT BE A SPECULATIVE TRANSACTION. 6. WE FIND THAT THE LD. CIT(A) HAS TAKEN A VERY CORRECT AND LEGAL VIEW OF THE MATER AND RIGHTLY DELETED THE ADDITIO N MADE BY THE AO. ACCORDINGLY, WE ARE INCLINED TO UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL OF THE REVENUE. 6 . WE HAVE CONSIDER ED RIVAL CONTENTION S AND PERUSED THE MATERIAL ON RECORD INCLUDING CASE LAWS RELIED UPON BOTH THE PARTIES . W E HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS AS MEMBER OF BOMBAY STOCK EXCHANGE, NATIONAL STOCK EXCHANGE, MCX - SX AND PARTICIPANT OF CDSL. THE I.T.A. NO.139/MUM/2016 20 ASSESSEE ENTERED INTO FOREIGN CURRENCY DERIVATE S TRADE ELECTRONICALLY ON SCREEN BASED SYSTEM THROUGH A REGISTERED BROKER IN A RECOGNISED STOCK EXCHANGE NAMELY NSE WHICH WAS BACKED BY TIME STAMPED CONTRACT AND HAS UNDISPUTEDLY COMPLIED WITH ALL THE REQUIREMENTS OF PROVISIONS OF S ECTION 43(5)(D) OF THE 1961 ACT. THE ONLY DISPUTE BETWEEN RIVAL PARTIES IS WH ETHER FOREIGN CURRENCY DERIVATIVES/FUTURES IS COVERED BY SECTION 2 OF THE SECURITIES CONTRACT S ( REGULATION ) ACT , 1956. THE AO WAS OF AN OPINION THAT FOREIGN CURRENCY FUTURES ARE NOT COVERED BY SECTION 2 OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 AND HENCE THE LOSS OF RS. 5,44,52,507/ - CLAIMED BY THE ASSESSEE ON ACCOUNT OF CURRENCY FUTURES IS NOT ALLOWABLE AS BUSINESS LOSS AND THE SAME IS TO BE CONSIDERE D AS A SPECULATIVE TRANSACTION IN ACCORDANCE WITH PROVISIONS OF SECTION 43(5) OF THE ACT AND HENCE LOSS ARISING THERE FROM IS SPECULATION LOSS . THE AO RELIED ON DEFINITION OF DERIVATIVES AS DEFINED IN SECTION2(AC) OF SCRA,1956 TO HOLD THAT THE ASSESSEE HAS NOT COMPLIED WITH THE REQUIREMENTS OF SECTION 43(5)(D) OF THE 1961 ACT AND HENCE LOSS IS A SPECULATIVE LOSS AND NOT BUSINESS LOSS . SO FAR AS FOREIGN CURRENCY IS CONCERNED, WE ARE IN AGREEMENT WITH THE AO THAT IT IS NOT A SECURITY WITHIN THE MEANING OF SC RA BUT THE AO FAILED TO DIFFERENTIATE BETWEEN THE FOREIGN CURRENCY PERSE AND FOREIGN CURRENCY DERIVATIVE WHEREIN THE FOREIGN CURRENCY IS A N UNDERLINE SECURITY . RE F E RENCE IS DRAWN TO THE DECISION OF ITAT - MUMBAI IN THE CASE OF INVENTURUS KNOWLEDGE SERVICES P . LTD V. ITO REPORTED IN ( 2016 ) 156 ITD 727 (MUMBAI), WHEREIN THE RELEVANT PORTION OF THE TRIBUNAL ORDER IS REPRODUCED HERE UNDER: - 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE RELEVANT MATERIAL ON RECORD AND CASE LAWS RELIED UPON BY THE PARTIES. WE HAVE OBSERVED THAT THE ASSESSEE COMPANY IS A DOMESTIC COMPANY REGISTERED WITH THE DEVELOPMENT COMMISSIONER, VISHAKHAPATN AM SPECIAL ECONOMIC ZONE AS AN APPROVED SEZ AND IS A KPO PRIMARILY INVOLVED IN THE REVENUE CYCLE MANAGEMENT FOR THE CLIENTS ACROSS AMERICA AND THE ASSESSEE COMPANY IS BILLING ITS OVERSEAS CLIENTS IN FOREIGN CURRENCY. THE ASSESSEE COMPANY HAS A TURNOVER OF RS. 5.83 CRORES DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. WE HAVE OBSERVED THAT ASSESSEE COMPANY HAS ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS AND THE CONTRACT WORTH USD 4 MILLION WERE OUTSTANDING AS UN - EXPIRED AS ON 31ST MARCH 2009 ON WHICH TH E ASSESSEE COMPANY HAS BOOKED MARKED TO MARKET LOSS OF RS. 1,09,98,560/ - ON THE DATE OF BALANCE SHEET AS AT 31ST MARCH 2009 BASED ON THE MOVEMENT OF VALUE OF UNITED STATES DOLLAR VIS - - VIS IN RELATION TO INDIAN RUPEES BASED ON PREVAILING RATE AS ON 31 - 03 - 2 009. BEFORE WE PROCEED FURTHER, IT WOULD BE RELEVANT TO ANALYSE THE PROVISIONS OF SECTION 43(5) OF THE ACT READ WITH PROVISO (D) AND EXPLANATION 1 TO SECTION 43(5) OF THE ACT WHICH READS AS UNDER: I.T.A. NO.139/MUM/2016 21 'DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES - XX XX XX ( 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 SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE - ( A ) TO ( C ) XX XX 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 XX XX SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. EXPLANATION 1 . - FOR THE PURPOSES OF CLAUSE ( D ), 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 DE POSITORIES 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 STO CK 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 ) 'RECOGNISE D 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 NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE;' SECTION 43(5) OF THE ACT PROVIDES THAT 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 SCRIPS 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 I.T.A. NO.139/MUM/2016 22 SECTION 2 OF THE SECURITIES CONTRACTS(REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK E XCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. WE WOULD ALSO LIKE TO REFER TO THE RELEVANT DEFINITIONS AS CONTAINED IN THE SECURITIES CONTRACT (REGULATION) ACT, 1956 AS UNDER: SECTION 2(AC) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 RE ADS AS UNDER: 'SECTION 2 IN THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 2 DEFINITIONS. - IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUIRES, - XX XX XX (AC) 'DERIVATIVE' INCLUDES - (A) A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES, OF UNDERLYING SECURITIES; SECTION 2(H) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 READS AS UNDER: SECTION 2 IN THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 2 DEFINITIONS. - IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUIRES, - ( H ) 'SECURITIES' INCLUDE - XX XX XX ( IA ) DERIVATIVE; XX XX XX' 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 CASE OF TRANSACTION IN DERIVATIVES, THE TRANSACTIO N IS ALWAYS SETTLED OTHERWISE THAN BY ACTUAL DELIVERY. THE DERIVATIVE DERIVES ITS VALUE FROM UNDERLYING ASSET WHICH CAN BE SECURITIES, COMMODITIES, BULLION, CURRENCY ETC. AND IN THIS INSTANT CASE, THE DERIVATIVE TRANSACTION UNDERTAKEN BY THE ASSESSEE COMPA NY, THE UNDERLYING ASSET OF DERIVATIVE TRANSACTION IS FOREIGN CURRENCY. THE WORD 'COMMODITY' IS USED IN BROADEST SENSE IN SECTION 43(5) OF THE ACT AS IT MENTIONS IN THE SECTION 43(5) OF THE ACT THAT THE COMMODITY INCLUDES STOCK AND SHARES. THUS, DERIVATIVE WILL BE INCLUDED IN THE DEFINITION OF THE WORD 'COMMODITY' AS HELD IN SHREE CAPITAL SERVICES LTD. ( SUPRA ). HENCE, DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY SHALL BE EXEMPTED FROM PURVIEW OF SPECULATIVE TRANSACTIONS U/S 43(5) OF THE ACT PROVIDED OTHER CO NDITIONS AS CONTAINED IN PROVISO (D) READ WITH EXPLANATION 1 TO SECTION 43(5) OF THE ACT ARE FULFILLED. OUR VIEW IS FORTIFIED BY THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2005 WHICH INTRODUCED CLAUSE (D) ((2005) 194 CTR(ST.) 147 , THE P URPOSE OF INTRODUCTION OF CLAUSE (D) HAS BEEN EXPLAINED, WHICH READS AS UNDER: 'MEASURES TO RATIONALIZE THE TAX TREATMENT OF DERIVATIVE TRANSACTION I.T.A. NO.139/MUM/2016 23 UNDER THE EXISTING PROVISIONS (CL.(5) OF S.43) A TRANSACTION FOR THE PURCHASE AND SALE OF ANY COMMODITY INCL UDING STOCKS AND SHARES IS DEEMED TO BE A 'SPECULATIVE TRANSACTION', IF IT IS SETTLED OTHERWISE THAN BY ACTUAL DELIVERY. HOWEVER, CERTAIN CATEGORIES OF TRANSACTIONS ARE EXCLUDED FROM THE PURVIEW OF SAID PROVISION. FURTHER, THE UNABSORBED SPECULATION LOSSES ARE ALLOWED TO BE CARRIED FORWARD FOR EIGHT YEARS FOR SET - OFF AGAINST SPECULATION PROFITS IN SUBSEQUENT YEARS. THESE RESTRICTIONS WERE ESSENTIALLY DESIGNED AS AN ANTI - EVASION MEASURE TO PREVENT CLAIMS OF ARTIFICIALLY GENERATED LOSSES IN THE ABSENCE OF AN APPROPRIATE INSTITUTIONAL INFRASTRUCTURE. RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCED BY STOCK MARKETS HAVE RESULTED IN SUFFICIENT TRANSPARENCY TO PREVENT GENERATING FICTITIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LO SS 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 OUT IN RESPECT OF TRADING IN DERIVATIVES IN A RECOGNIZED STOCK EXCHANGE 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 RECOGNIZED 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. YS 2006 - 07 AND SUBSEQUENT YEARS.' F ROM THE ABOVE IT IS EVIDENT THAT THE ELIGIBLE TRANSACTIONS IN DERIVATIVES CARRIED OUT THROUGH RECOG NIZED STOCK EXCHANGES ARE EXEMPTED FROM THE PURVIEW OF SPECULATION TRANSACTIONS U/S 43(5) OF THE ACT PROVIDED OTHER CONDITIONS ARE SATISFIED BECAUSE OF RECENT AND SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCED BY STOCK EXCHANGES. WE HAVE OBSERVED THAT THE A SSESSEE COMPANY HAS ENTERED INTO DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY THROUGH SEBI REGISTERED BROKER WHO IS A MEMBER NATIONAL STOCK EXCHANGE OF INDIA LIMITED AND THESE DERIVATIVE TRANSACTIONS ARE CARRIED ON THROUGH NATIONAL STOCK EXCHANGE OF INDIA W HICH IS A RECOGNIZED STOCK EXCHANGE AND THESE TRANSACTIONS ARE BACKED BY TIME STAMPED CONTRACT NOTES CARRYING UNIQUE CLIENT IDENTITY NUMBER AND PAN ALLOTTED UNDER THE ACT. THE RELIANCE OF THE LD. DR ON THE CASE OF ARASKA DIAMOND (P.) LTD. ( SUPRA ) IS MISCON CEIVED AS IN THIS CASE THE ASSESSEE DID NOT FULFIL THE CONDITIONS AS STIPULATED UNDER SECTION 43(5) OF THE ACT READ WITH PROVISO AND EXPLANATION THERETO TO ENTITLE THE ASSESSEE TO BRING FORWARD CONTRACT IN FOREIGN CURRENCY WITHIN FOUR CORNERS OF EXEMPTION FROM BEING TREATED AS NON - SPECULATIVE TRANSACTION AS PER MANDATE OF SECTION 43(5) OF THE ACT. THUS, WE HOLD THAT THESE DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY AS ENTERED INTO BY THE ASSESSEE COMPANY DULY FULFIL ALL THE CONDITIONS AS SPECIFIED U/S 43(5) OF THE ACT READ WITH PROVISO (D) AND EXPLANATION 1 TO SECTION 43(5) OF THE ACT. WE FURTHER HOLD THAT THESE TRANSACTIONS ARE COVERED BY THE EXCEPTION AS CONTAINED IN PROVISO (D) TO SECTION 43(5) OF THE ACT AND HENCE ARE NOT SPECULATIVE TRANSACTIONS AS DEFI NED UNDER SECTION 43(5) OF THE ACT. THUS, WE HOLD THAT LOSS OF RS. 1,09,98,560/ - INCURRED BY THE COMPANY ON DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY IN THE INSTANT APPEAL IS NOT A SPECULATIVE LOSS WITHIN THE DEFINITION AS CONTAINED IN SECTION 43(5) OF T HE ACT. I.T.A. NO.139/MUM/2016 24 THE TRIBUNAL IN THE ABOVE CASE IN 156 ITD 727 HAS HELD THAT TRANSACTIONS IN DERIVATIVE IN FOREIGN CURRENCY IS NOT A SPECULATIVE TRANSACTION AND SHALL BE COVERED BY EXCEPTION AS CONTAINED IN PROVISO (D) TO SECTION 43(5) OF THE 1961 ACT AND THE LOSS WAS HELD TO BE NOT SPECULATIVE LOSS. WE HAVE ALSO OBSERVED THAT THE TRIBUNAL IN THE CASE OF EDELWEISS GLOBAL WEALTH MANAGEMENT LTD. (SUPRA) HAS HELD THAT THE SAID LOSS IS A BUSINESS LOSS . THE ORDER OF THE TRI BUNAL WAS REPRODUCED IN PRECEDING PARAS OF THIS ORDER AND THE SAME IS NOT REPRODUCED AGAIN TO AVOID REPETITION . THUS, KEEPING IN VIEW RATIO OF ABOVE DECISIONS OF THE TRIBUNAL WHICH WE RESPECTFULLY FOLLOW, WE HOLD THAT THE SAID LOSS IN FOREIGN CURRENCY DE RIVATIVES IN THE INSTANT CASE BE ASSESSED AS BUSINESS LOSS AND NOT AS SPECULATIVE LOSS . THUS, IN THE RESULT REVENUE FAILS IN THIS APPEAL. WE ORDER ACCORDINGLY. 7. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 7 .07.2018 2 7 .07.2018 S D / - S D / - (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 2 7 .07.2018 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI