DLF Commercial Developers Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 1446/DEL/2011

• Counselvise Citation: 144620114 RSA 2011
• Duration Of Justice: 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 22-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRI KRISHNA
• Assessee Lawyers: R K KAPOOR
• Keywords: Business income; Transactions in derivatives; Speculation loss; Futures and options; Speculative transactions; Set aside
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI RAJPAL YADAV, JM AND SHRI K. D. RANJAN, AM I. T. APPEAL NO. 1446 (DEL) OF 2011. ASSESSMENT YEAR : 2007-08. DLF COMMERCIAL DEVELOPERS LIMITED, ADDL. C OMMISSIONER OF INCOME-TAX, 9 TH FLOOR, D L F CENTRE, VS. R A N G E : 10, S A N S A D M A R G, N E W D E L H I. N E W D E L H I 110 001. P A N / G I R NO. AAB CD 4619 C. A N D I. T. APPEAL NO. 2065 (DEL) OF 2011. ASSESSMENT YEAR : 2007-08. ASSTT. COMMISSIONER OF INCOME-TAX, DLF C OMMERCIAL DEVELOPERS LIMITED, C I R C L E : 10 (1), VS. 9 TH FLOOR, D L F CENTRE, N E W D E L H I. S A N S A D M A R G, N E W D E L H I 110 001. P A N / G I R NO. AAB CD 4619 C. ( APPELLANTS ) ( RESPONDENTS ) ASSESSEE BY : SHRI PRADEEP DINODIA, C. A.; & SHRI R. K. KA POOR, C. A.; DEPARTMENT BY : SHRI SRI KRISHNA [CIT] D. R. O R D E R. P E R B E N C H ; THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE FOR ASSESSMENT YEAR 2007-08 ARISE OUT OF ORDER OF THE LD. CIT (APPEALS)XVIII, NEW DE LHI. THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF, FOR THE SAKE OF CONVENIENCE, BY THIS CONSOLIDATED ORDER. 2 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REA D AS FOLLOWS :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF TH E CASE, THE LD. CIT (APPEALS)- XVIII, NEW DELHI HAS ERRED IN LAW IN UPHOLDING THAT LOSS INCURRED ON DERIVATIVES IS A SPECULATIVE LOSS FOLLOWING THE EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT, 1961; 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (APPEALS)- XVIII, NEW DELHI HAS ERRED IN LAW IN NOT APPRECIATI NG THAT SECTION 73 COMES INTO PLAY ONLY IF THE LOSSES ARE CARRIED FORWARD FOR SET OFF; 3. THE LD. CIT (APPEALS)-XVIII, NEW DELHI OUGHT TO HAVE HELD THAT SECTION 73 DOES NOT OVERRIDE SECTION 71 OF THE INCOME TAX A CT, 1961 AND AS PER THE SCHEME OF LAW SECTION 71 SHOULD GOT PRECEDENCE OVER SECTION 73 OF THE INCOME TAX ACT, 1961. 3. THE GROUND OF APPEAL RAISED BY THE REVENUE READ S AS FOLLOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT (APPEALS)- HAS ERRED IN DELETING THE ADDITION OF RS.4,13,81,43 2/- MADE BY THE ASSESSING OFFICER MADE ON ACCOUNT OF NON-REFUNDABLE MEMBERSHI P FEES. 4. FIRST WE WILL TAKE UP THE APPEAL FILED BY THE RE VENUE. THE ONLY ISSUE FOR CONSIDERATION IN REVENUES APPEAL RELATES TO DELETING THE ADDITION O F RS.4,13,81,432/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF NON-REFUNDABLE MEMBERSHIP FEE . THE ASSESSING OFFICER HAD MADE DISALLOWANCE ON ACCOUNT OF NON REFUNDABLE MEMBERSHI P FEE IN RESPECT OF CLUB MEMBERSHIPS GRANTED TO VARIOUS INDIVIDUALS / CORPORATE ENTITIES . THE FACTS OF THE CASE ARE THAT MEMBERSHIP FEE IS RECEIVED BY THE ASSESSEE IN ADVANCE AGAINST WHIC H THE SERVICES WILL REQUIRED TO BE RENDERED OVER A PERIOD OF THREE / FIVE / SEVEN YEARS FOR WHI CH MEMBERSHIP IS GRANTED. THE ASSESSEE HAD ACCOUNTED FOR THE MEMBERSHIP FEE YEARLY IN THE PROP ORTION TO THE PERIOD FOR WHICH MEMBERSHIP FEE WAS RECEIVED. HOWEVER, THE ASSESSING OFFICER H AS SOUGHT TO TAX THE TOTAL AMOUNT RECEIVED DURING THE YEAR OF RECEIPT ITSELF. AT THE TIME OF HEARING, IT WAS CONTENDED BY THE LD. AR OF THE ASSESSEE THAT ASSESSEES CASE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, 3 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . DELHI BENCH B FOR ASSESSMENT YEAR 2006-07 DATED 8 /07/2011 IN I.T. APPEAL NO. 2064 (DEL) OF 2011. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF ITAT IN ASSESSEES OWN CASE WHEREIN IT HAS BEEN HELD AS UNDER :- 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AND GONE THROUGH THE RECORD CAREFULLY. IN BRIEF, THE CASE OF THE ASSESSEE IS T HAT AMOUNTS RECEIVED BY IT UNDER DIFFERENT MEMBERSHIP SCHEMES OF THE GOLF CLUB ARE IN THE SHAP E OF ADVANCE. THE SERVICES AGAINST THE SAID ADVANCE WERE YET TO BE PROVIDED, WHICH COU LD BE RENDERED BY THE ASSESSEE IN SUBSEQUENT PERIOD AND, THEREFORE, INCOME QUA THOSE RECEIPTS WOULD ACCRUE ONLY IN THE LATER PERIOD. THE OBLIGATION TO PROVIDE SERVICE IS UPON THE ASSESSEE AND THERE WOULD BE OUT-FLOW OF AMOUNT FOR PROVIDING SUCH SERVICE TO TH E ULTIMATE MEMBERS. HENCE, TOTAL RECEIPTS CANNOT BE RECOGNIZED AS A REVENUE RECEIPTS AT THE TIME OF RECEIPT. ON THE OTHER HAND, CASE OF THE REVENUE IS THAT THERE IS NO OBLIG ATION UPON THE ASSESSEE TO REFUND THOSE AMOUNTS TO THE ULTIMATE CUSTOMERS, HENCE, AN ABSOLU TE RIGHT TO RETAIN THE MONEY HAS BEEN CRYSTALLIZED UNDER SOME OF THE CONDITIONS OF PROVID ING MEMBERSHIP. THEREFORE, IT IS TAXABLE IN THE YEAR UNDER WHICH THESE AMOUNTS HAVE BEEN RECEIVED. WE FIND THAT ISSUE IN DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE ASSESS EE BY THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF DINESH KUMAR GOEL (SUPRA) . IN THIS CASE, THE ASSESSEE SHRI DINESH KUMAR GOEL WAS RUNNING COACHING INSTITUTE UN DER THE NAME AND STYLE OF M/S FIITJEE. HE IS THE SOLE PROPRIETOR. AT THE TIME OF ADMISSION OF THE STUDENT, THE INSTITUTE TOOK THE FEES FOR TWO YEARS. THE ISSUE WAS WHETHER TOTAL FEES RECEIVED BY THE ASSESSEE AT THE TIME OF ADMISSION FOR A COURSE OF TWO YEARS DUR ATION IS TO BE RECOGNIZED AS REVENUE RECEIPTS IN THE YEAR OF RECEIPT OR IT HAS TO BE SPR EAD OVER FOR TWO YEARS. THE LEARNED ASSESSING OFFICER TREATED THE TOTAL RECEIPTS AS TAX ABLE IN THE YEAR OF RECEIPT. HOWEVER, LEARNED CIT(A) AS WELL AS THE ITAT DELETED THE ADDI TION AND ALLOWED THE ASSESSEE TO SPREAD THE RECEIPTS IN TWO YEARS. HONBLE HIGH COU RT HAS CONSIDERED THE SCOPE OF TOTAL INCOME PROVIDED IN SECTION 5 OF THE INCOME-TAX ACT, 1961 AND HAS OBSERVED THAT INCOME WOULD ACCRUE OR ARISE OR IS DEEMED TO OCCUR OR ARIS E TO AN ASSESSEE IN INDIA DURING SUCH 4 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . YEAR WHEN A RIGHT TO RECEIVE CRYSTALLIZED IN FAVOUR OF THE ASSESSEE. SIMILARLY, IN THE CASE OF MAHINDRA HOLIDAYS & RESORTS (SUPRA), FACTS ARE T HAT ASSESSEE HAS BEEN RECEIVING AMOUNTS FOR SELLING TIMESHARE UNIT. UNDER THE SCHE ME A PERSON CAN BECOME A MEMBER EITHER BY PAYING THE FULL AMOUNT AT A TIME OR BY PA YING INSTALMENTS. THE MEMBERS ARE ENTITLED TO ENJOY THE HOLIDAYS ONLY AFTER 12 OR 18 MONTHS, FROM THE DATE OF MEMBERSHIP. THE MEMBERSHIP WILL BE ENTITLED TO FACILITATE A STA Y AT A RESORT FOR ONE WEEK IN A YEAR FOR 33/25 YEARS. THE ASSESSEE HAS RECOGNIZED 40% OF TH E TOTAL COST OF MEMBERSHIP TOWARDS ACCOMMODATION AND 60% TOWARDS FACILITIES. IT OFFER ED 40% OF THE RECEIPTS OF TAX IN THE YEAR OF RECEIPT OF THE MEMBERSHIP FEES. THE DISPUT E AROSE BETWEEN THE ASSESSEE AND THE REVENUE IS, WHETHER ENTIRE AMOUNT OF TIMESHARE MEMB ERSHIP FEES RECEIVABLE BY THE ASSESSEE UPFRONT AT THE TIME OF AN ENROLMENT IS AN INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR WHEN THERE IS A CONTRACTUAL OBLIGATION FASTENE D TO THE RECEIPT TO PROVIDE THE SERVICES IN FUTURE YEAR OVER THE PERIOD OF CONTRACT? THE SP ECIAL BENCH AFTER A DETAILED ANALYSIS ARRIVED AT A CONCLUSION THAT ENTIRE AMOUNT OF TIME- SHARE MEMBERSHIP FEES RECEIVED BY THE ASSESSEE UPFRONT AT THE TIME OF ENROLMENT OF A MEMB ER IS NOT THE INCOME CHARGEABLE TO TAX IN THE INITIAL YEAR, AND ASSESSEE HAS RIGHTLY SPREA D OVER IT IN THE FUTURE YEAR. THE FACTS IN THE CASE BEFORE US ARE IDENTICAL. THE ASSESSEE IS ALSO ACCOUNTING THE RECEIPT FOR WHICH SERVICE IS BEING PROVIDED IN THE YEAR ITSELF AND BA LANCE IS SPREAD OVER DURING THE PERIOD OF MEMBERSHIP. LEARNED FIRST APPELLATE AUTHORITY H AS APPRECIATED THE FACTS IN RIGHT PERSPECTIVE AND HAS RIGHTLY PLACED HIS RELIANCE ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF E.D. SASSOON AND COMPANY LIMIT ED VS. CIT 26 ITR 27 AS WELL AS OF THE SPECIAL BENCH, WE DO NOT FIND ANY ERROR IN THE ORDER OF LEARNED CIT(A), HENCE, APPEAL OF THE REVENUE IS DISMISSED. SINCE THE ISSUE IS COVERED BY THE DECISION OF ITAT IN THE ASSESSEES OWN CASE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD. CIT (APPEA LS) DELETING THE ADDITION. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 5 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . I. T. APPEAL NO. 1446 (DEL) OF 2011 [BY THE ASSES SEE] : 7. NOW WE WILL DEAL WITH THE APPEAL FILED BY THE AS SESSEE. THE ONLY ISSUE FOR CONSIDERATION IN ASSESSEES APPEAL RELATES TO UPHOLDING THE ADDIT ION MADE ON ACCOUNT OF LOSS INCURRED ON DERIVATIVES BY HOLDING THAT IT IS A SPECULATIVE LOS S WITHIN THE MEANING OF EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT, 1961. THE FACTS OF THE C ASE STATED IN BRIEF ARE THAT THE ASSESSEE CLAIMED LOSS OF RS.492.71 LAKHS ON ACCOUNT OF PURCH ASE AND SALE OF SHARES. TO A QUERY IT WAS SUBMITTED BY THE ASSESSEE THAT THE LOSS IN TRADING OF DERIVATIVES WAS NOT A SPECULATIVE LOSS AS DEFINED IN SECTION 43(5) OF THE INCOME TAX ACT AND COULD NOT BE DISALLOWED AS SPECULATIVE LOSS UNDER ANY PROVISIONS OF THE INCOME TAX ACT. THE AO , HOWEVER, REJECTED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT PROVISIONS OF SECTION 7 3 WERE APPLICABLE AND HAVE INDEPENDENT EXISTENCE AND ARE NOT DEPENDENT ON SATISFACTION OF SECTION 43(5). EXPLANATION TO SECTION 73 CAN BE APPLIED EVEN IF THERE IS DELIVERY BASED SALE PUR CHASE SHARES AND ALSO IN SITUATIONS OF TRADING OF DERIVATIVES. THE ASSESSEE WAS NOT ENGAGED IN ANY OF THE SPECIFIED EXCLUDED CATEGORIES OF BUSINESS SO AS TO COME OUT OF THE CLUTCHES OF EXPLANATION TO SECTION 73. THE AO PLACED RELIANCE ON VARIOUS DECISIONS AND HELD THAT LOSS OF RS.492.71 L AKHS HAD TO BE TREATED AS SPECULATIVE LOSS AND COULD NOT BE ALLOWED TO BE ADJUSTED AGAINST BUSINES S INCOME. 8. ON APPEAL, BEFORE CIT(A) THE LD. AR OF THE ASSE SSEE SUBMITTED THAT THE ASSESSEE WAS NOT ENGAGED IN THE BUSINESS OF SHARE TRADING AS SUCH. THE ASSESSEE HAD SUFFERED LOSS IN TRADING OF DERIVATIVES. SECTION 43(5) OF THE ACT DEFINES THE TERM SPECULATIVE TRANSACTIONS, WHICH MEANS A TRANSACTION IN WHICH A CONTRACT FOR PURCHASE AND SA LE OF ANY COMMODITY INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHER WISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS. PROVISO TO SECTION 43(5) CONT AINS EXCEPTIONS TO THIS DEFINITION. CLAUSE (D) OF PROVISO TO SECTION 43(5) SAYS THAT AN ELIGIBLE T RANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECU RITIES CONTRACTS (REGULATION) ACT, 1956 [42 OF 1956] CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SH ALL NOT BE DEEMED TO BE A SPECULATIVE 6 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . TRANSACTION. IT WAS, THEREFORE, SUBMITTED THAT LOS S SUFFERED IN DERIVATIVE TRANSACTIONS COULD NOT BE TREATED AS SPECULATIVE LOSS AND, THEREFORE, PROVISI ONS OF EXPLANATION TO SECTION 73 COULD NOT BE INVOKED. THE LD. AR OF THE ASSESSEE PLACED RELIANC E ON THE DECISION OF SPECIAL BENCH OF THE ITAT, KOLKATA IN THE CASE OF DCIT VS. VENKETESHWAR INV. & FINANCE P. LTD. THE LD. CIT (APPEALS) FURTHER OBSERVED THAT ASSESSEES RELIANCE ON THE PROVISIONS OF PROVISO (D) TO SECTION 43(5) WAS NOT RELEVANT TO THE ISSUE AT HAND. THE I SSUE INVOLVED WAS WHETHER THE LOSS MADE ON DERIVATIVE TRANSACTIONS COULD BE SET OFF AGAINST B USINESS INCOME EARNED DURING THE YEAR. THE LD. CIT (APPEALS) REFERRING TO THE EXPLANATION TO SECTI ON 73 OBSERVED THAT THE ASSESSEES BUSINESS MAINLY CONSISTED REAL ESTATE DEVELOPMENT, LEASING O F PROPERTIES, OPERATION OF GOLF COURSE IN GURGAON AND POWER GENERATION AND NOT TRADING IN SHA RES. AS SUCH, THE ASSESSEE WAS NOT COVERED WITHIN THE EXCEPTIONS PROVIDED IN SECTION 73 WHICH INCLUDES ONLY A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABL E UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS BUSINESS OF BANKING OR GRANTING OF LOANS OR ADVANCES . HE DISTINGUISHED THE DECISION OF SPECIAL BENCH IN THE CASE OF VENKETSHWARA INV. & FINANCE PVT. LTD. ON THE GROUND THAT IN THAT CASE SET OFF OF LOSS IN SHARE TRANSACTION WAS INVOLVED AGAINST INCOME EARNED FROM GRANTING OF LOANS AND ADVANCES WHOSE PR INCIPAL BUSINESS WAS GRANTING OF LOANS AND ADVANCES. THE LD. CIT (A), THEREFORE, CONCLUDED TH AT EXPLANATION TO SECTION 73 WAS APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. HE, THEREFORE, U PHELD THE DISALLOWANCE OF RS.4,92,71,000/-. 8.1 BEFORE US THE LD. AR OF THE ASSESSEE REITERATED SIMILAR ARGUMENTS AS WERE ADVANCED BEFORE THE LOWER AUTHORITIES. HE FURTHER SUBMITTED THAT I TAT, MUMBAI BENCH IN THE CASE OF DCIT VS. SSKI INVESTORS SERVICE P. LTD. 113 TTJ 511 HAS HELD THAT DEALING IN DERIVATIVES BEING A SEPARATE KIND OF TRANSACTION WHICH DOES NOT INVOLVE ANY PURC HASE AND SALE OF SHARES, LOSS ON ACCOUNT OF DERIVATIVE TRADING COULD NOT BE TREATED AS SPECULAT IVE LOSS. HE ALSO PLACED RELIANCE ON THE DECISION OF ITAT IN THE CASE OF RBK SECURITIES P. L TD. VS. ITO 118 TTJ 465 WHEREIN IT HAS BEEN HELD THAT DEALING IN DERIVATIVES STANDS ON DIFFEREN T FOOTING THAN DELETING IN PURCHASE AND SALE OF SHARES. HE ALSO PLACED RELIANCE ON THE DECISION OF THE ITAT, BANGALORE BENCH IN THE CASE OF C. BHARAT KUMAR VS. DCIT 4 SOT 593 WHEREIN SIMILAR VIE W HAS BEEN TAKEN. HE FURTHER SUBMITTED 7 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . THAT THE AO AS WELL AS THE LD. CIT (A) HAD NOT PROP ERLY APPRECIATED THE DIFFERENCE BETWEEN DEALING IN SHARES I.E. SALE AND PURCHASE OF SHARES AND DEALING IN DERIVATIVES AND, THEREFORE, HAD ERRONEOUSLY PROCEEDED TO INCLUDE DERIVATIVE TRANSAC TIONS WITHIN THE MEANING OF EXPLANATION TO SECTION 73 OF THE ACT. THE LD. AR OF THE ASSESSEE ALSO SUBMITTED THAT ITAT, CHENNAI BENCH IN THE CASE OF DCIT VS. PETERSON SECURITIES P. LTD. 12 7 I.T.D. 386 HAS HELD THAT DERIVATIVES ARE NOT FOR PURCHASE OR SALE OF ANY PHYSICAL COMMODITY AS S UCH AND, THEREFORE, TRADING IN DERIVATIVES COULD NOT BE TREATED AS SPECULATIVE TRANSACTIONS IN THE STRICT SENSE OF SECTION 43(5). THE LD. AR OF THE ASSESSEE FURTHER CLARIFIED THAT IN THIS CASE TH E ASSESSMENT YEAR INVOLVED WAS 2004-05 I.E. PRIOR TO INSERTION OF CLAUSE (D) IN SECTION 43(5) OF THE INCOME TAX ACT. ITAT HAS STILL HELD THAT LOSS IN DERIVATIVE TRADING COULD BE SET OFF OF OTHER BUSINE SS. HE ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS OF THE ITAT WHEREIN SIMILAR VIEW HAS BEEN TAKEN:- 1. HITESH SATISH CHANDRA JOSHI VS. JCIT 140 TTJ 3 2 (MUM.) & 2. ACIT VS. HIREN JASWANT RAI SHAH 46 SOT 276 (AHD .). 8.2 ON THE OTHER HAND, THE LD. SR. DR SUBMITTED THA T SET OFF OF LOSSES IS TO BE ALLOWED AS PER PROVISIONS OF SECTION 72 TO 80 OF THE ACT. SECTION 73 FALLS IN CHAPTER VI AND THEREFORE, DEEMING PROVISIONS OF SECTION 43(5) CANNOT BE APPLIED TO EX PLANATION TO SECTION 73 OF THE ACT. PROVISIONS OF SECTION 43(5) HAVE TO BE READ WITH THE PROVISION S OF SECTION 73. THE LD. CIT(DR) FURTHER SUBMITTED THAT THE DECISIONS RELIED UPON BY THE ASS ESSEE ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. THEREFORE, PROVISIONS OF EXPLANAT ION TO SECTION 73 OF THE ACT ARE APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. HE ACCORDINGLY SU PPORTED THE ORDER OF THE LD. CIT (APPEALS). 9.1 WE HAVE HEARD BOTH THE PARTIES. THE ASSESSEE I S ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT, LEASING OF PROPERTIES, OPERATION OF GO LF COURSE IN GURGAON AND POWER GENERATION. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE WA S ENGAGED IN TRADING DERIVATIVES ON THE PLATFORM OF NATIONAL STOCK EXCHANGE. SECTION 43(5) DEFINES THE TERM SPECULATIVE TRANSACTIONS AND MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE AND SALE OF ANY COMMODITY 8 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . INCLUDING STOCKS AND SHARES IS PERIODICALLY OR ULTI MATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF COMMODITY OR SCRIPS. PROVI SO TO SECTION 43(5) CARVES OUT EXCEPTIONS, WHICH ARE NOT DEEMED TO BE SPECULATIVE TRANSACTIONS . CLAUSE (D) OF PROVISO TO SECTION 43(5) STATES THAT AN ELIGIBLE TRANSACTION IN RESPECT OF T RADING IN DERIVATIVES REFERRED TO CLAUSE (AC) OF TH E SECURITIES CONTRACT (REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE EXP RESSIONS ELIGIBLE TRANSACTION AND RECOGNISED STOCK EXCHANGE HAVE BEEN DEFINED IN EXPLANATION TO SECTION 43(5) OF THE ACT WHICH WAS INSERTED BY THE FINANCE ACT, 2005 W.E.F 1.4.2006 AND READS A S UNDER :- EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, TH E EXPRESSIONS (I) ELIGIBLE TRANSACTION MEANS ANY TRANSACTION, (A) CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYS TEMS THROUGH A STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UN DER SECTION 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (1 5 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (RE GULATION) 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 RUL ES, 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 C LIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALL OTTED UNDER ANY ACT REFERRED TO IN SUB-CLAUSE (A) AND PERMANENT ACCOUNT NUMBER A LLOTTED UNDER THIS ACT. (II) RECOGNISED STOCK EXCHANGE MEANS A RECOGNISED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE P RESCRIBED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE. 9 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . 9.2 CLAUSE (AC) OF SECTION (2) OF THE SECURITIES CO NTRACTS (REGULATION) ACT, 1956 READS AS UNDER :- (AC) DERIVATIVES INCLUDE : (A). A SECURITY DERIVED FROM A DEBIT INSTRUMENT, S HARE, LOAN WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFEREN CES OR ANY OTHER FORM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM THE PR ICES OR INDEX OR PRICES OF UNDERLINE SECURITIES. 10. FROM THE DEFINITION OF TERM DERIVATIVE AS REP RODUCED ABOVE IT IS CLEAR THAT DERIVATIVE IS A SECURITY DERIVED FROM DEBIT INSTRUMENT, SHARE, LOAN ETC OR A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES OR INDEX OR PRICES OF UNDERLINE SECURITI ES. ITAT KOLKATA IN THE CASE OF SHREE CAPITAL SERVICES LTD. V. ASSISTANT COMMISSIONER OF INCOME-T AX , CIRCLE-5, KOLKATA 121 ITD 498 REFERRED TO DEFINITION OF TERM DERIVATIVE AS EXPLAINED BY SEBI. AS PER SEBI THE DEFINITION OF TERM 'DERIVATIVE', IS AS UNDER:- 'THE TERM 'DERIVATIVE' INDICATES THAT IT HAS NO IND EPENDENT VALUE, I.E., ITS VALUE IS ENTIRELY 'DERIVED' FROM THE VALUE OF THE UNDERLYING ASSET. T HE UNDERLYING ASSET CAN BE SECURITIES, COMMODITIES, BULLION, CURRENCY, LIVESTOCK OR ANYTHI NG ELSE. IN OTHER WORDS, DERIVATIVE MEANS A FORWARD, FUTURE, OPTION OR ANY OTHER HYBRID CONTRACT OF PREDETERMINED FIXED DURATION, LINKED FOR THE PURPOSE OF CONTRACT FULFIL LMENT TO THE VALUE OF A SPECIFIED REAL OR FINANCIAL ASSET OR TO AN INDEX OF SECURITIES'. FROM THE ABOVE IT IS CLEAR THAT THE DERIVATIVES DER IVE ITS VALUE FROM THE UNDERLYING ASSET. THE UNDERLYING ASSET CAN BE SECURITIES, COMMODITIES, BU LLION, CURRENCY ETC. THEREFORE, THE SECURITY DERIVED FROM A SHARE IS DIFFERENT FROM SHARE ITSELF . 10 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . 11. IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2005, WHICH INTRODUCED CLAUSE (D) [273 ITR (ST.) 207], THE PURP OSE OF INTRODUCTION OF CLAUSE (D) HAS BEEN EXPLAINED, WHICH READS AS UNDER :- MEASURES TO RATIONALISE THE TAX TREATMENT OF DERIV ATIVE TRANSACTION UNDER THE EXISTING PROVISIONS [CLAUSE (5) OF SECTIO N 43] A TRANSACTION FOR THE PURCHASE AND SALE OF ANY COMMODITY INCLUDING STOCKS AND SHAR ES IS DEEMED TO BE A 'SPECULATIVE TRANSACTION', IF IT IS SETTLED OTHERWISE THAN BY AC TUAL DELIVERY. HOWEVER, CERTAIN CATEGORIES OF TRANSACTIONS ARE EXCLUDED FROM THE PU RVIEW OF THE SAID PROVISION. FURTHER, THE UNABSORBED SPECULATION LOSSES ARE ALLOWED TO BE CARRIED FORWARD FOR EIGHT YEARS FOR SET-OFF AGAINST SPECULATION PROFITS IN SUBSEQUENT Y EARS. THESE RESTRICTIONS WERE ESSENTIALLY DESIGNED AS AN ANTI-EVASION MEASURE TO PREVENT CLAI MS OF ARTIFICIALLY GENERATED LOSSES IN THE ABSENCE OF AN APPROPRIATE INSTITUTIONAL INFRAST RUCTURE. RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCE D BY STOCK MARKETS HAVE RESULTED IN SUFFICIENT TRANSPARENCY TO PREVENT GENERATING FICTI TIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. THE SCREEN BASED COMPUTERIZED TRADING PROVIDES FOR AN EXCELLENT AUDI T 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 RECOG NIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE PROPOSE D AMENDMENT ALSO SEEKS TO NOTIFY RELEVANT RULES ETC. REGARDING CONDITIONS TO BE FULF ILLED BY RECOGNISED EXCHANGES IN THIS REGARD. FURTHER IT IS ALSO PROPOSED TO AMEND SUB-SE CTION (4) OF SECTION 73 SO AS TO REDUCE THE PERIOD OF CARRY FORWARD OF SPECULATION LOSSES F ROM EIGHT ASSESSMENT YEARS TO FOUR ASSESSMENT YEARS. 11 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . THESE AMENDMENTS WILL TAKE EFFECT FROM 1-4-2006 AND WILL, ACCORDINGLY, APPLY IN RELATION TO ASSESSMENT YEAR 2006-07 AND SUBSEQUENT YEARS. FROM THE ABOVE IT IS EVIDENT THAT THE TRANSACTION I N DERIVATIVES IS EXEMPTED FROM THE PURVIEW OF SPECULATIVE TRANSACTION UNDER SECTION 43(5) BECAUSE OF RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCED BY STOCK EXCHANGE. THE ABOVE INTENTION O F THE LEGISLATURE IS ALSO CLEAR FROM THE FACT THAT ALL THE TRANSACTIONS IN DERIVATIVES HAVE NOT B EEN EXEMPTED FROM THE AMBIT OF SPECULATIVE TRANSACTION UNDER SECTION 43(5) BUT ONLY THE ELIGIB LE TRANSACTIONS OF TRADING IN DERIVATIVES CARRIED OUT IN A RECOGNISED STOCK EXCHANGE ARE EXEMPT. TH US IN A CASE WHERE ASSESSEE IS TRADING IN DERIVATIVES DERIVED FROM SHARES THROUGH A RECOGNISE D STOCK EXCHANGE WHEREIN THERE IS NO PHYSICAL DELIVERY TAKEN OR GIVEN, SUCH ACTIVITY OF TRADING IN DERIVATIVES WILL NOT BE TREATED AS SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF PROV ISO (D) TO SECTION 43(5) OF THE ACT. THE TRADING IN DERIVATIVES HAS TO BE TREATED AS A SEPAR ATE ACTIVITY THAN TRADING IN SHARES DIRECTLY. THEREFORE, THE LOSS OCCURRED FROM THE TRADING IN EL IGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES THROUGH RECOGNIZED STOCK EXCHANGE CANNO T BE TREATED AS SPECULATIVE LOSS. 12. ITAT AHMEDABAD BENCH B IN THE CASE OF HIREN J ASWANT RAI SHAH (SUPRA) HAS HELD THAT IF TRANSACTIONS ARE CARRIED OUT THROUGH STOCK EXCHA NGES RECOGNIZED BY NOTIFICATION ISSUED BY CBDT ON 25/01/2006 WOULD BE ELIGIBLE FOR BEING TREA TED AS NON-SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF CLAUSE (D) OF PROVISO TO SECTION 43( 5). IT WAS ALSO HELD THAT WITH EFFECT FROM 1/04/2006 AMENDMENTS WERE MADE IN SECTION 43(5) AND THE TRANSACTIONS INVOLVED IN THE DERIVATIVES WERE TAKEN OUT OF DEFINITION OF SPECULA TIVE TRANSACTIONS. FOR THIS PURPOSE CLAUSE (D) WAS INSERTED IN SECTION 43(5). THIS AMENDMENT WAS HELD PROSPECTIVE IN NATURE AND APPLICABLE FROM ASSESSMENT YEAR 2006-07. 13. ITAT, MUMBAI J BENCH IN THE CASE OF JCIT VS . SSKI INVESTORS SERVICES P. LTD. (SUPRA) HAS HELD THAT DEALING IN DERIVATIVES BEING A SEPARATE KIND OF TRANSACTION WHICH DOES NOT INVOLVE ANY PURCHASE AND SALE OF SHARES, LOSS ON AC COUNT OF DERIVATIVE TRADING CANNOT BE TREATED 12 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . AS SPECULATIVE LOSS. ITAT, MUMBAI BENCH IN THE CAS E OF BRK SECURITIES P. LTD. (SUPRA) HAS HELD THAT DEALING IN DERIVATIVES IS A SEPARATE KIND OF T RANSACTION WHICH DOES NOT INVOLVE ANY PURCHASE AND SALE OF SHARES AND, THEREFORE, LOSS ON ACCOUNT OF F & O(FUTURES AND OPTIONS) TRANSACTIONS COULD NOT BE TREATED AS SPECULATIVE LOSS. SIMILARL Y, ITAT, CHENNAI BENCH IN THE CASE OF DCIT VS. PETERSON SECURITIES P. LTD. (SUPRA) HAS HELD TH AT TRADING IN DERIVATIVES COULD NOT BE CONSIDERED AS SPECULATIVE TRANSACTION. SET OFF OF LOSS OF DERIVATIVE TRADING AGAINST THE PROFIT OF SHARE TRADING BUSINESS WAS HELD TO BE PERMISSIBLE. ITAT, MUMBAI BENCH IN THE CASE OF HITESH SATISH CHANDRA JOSHI HAS HELD THAT LOSS FROM DERIVA TIVE TRANSACTIONS WAS BUSINESS LOSS DURING ASSESSMENT YEAR 2006-07. 14. IN THE CASE BEFORE US THE ASSESSEE WAS NOT ENGA GED IN THE BUSINESS OF SHARE TRADING AS SUCH. THE ASSESSEE HAD SUFFERED LOSS IN TRADING OF DERIVATIVES CARRIED THROUGH RECOGNIZED STOCK EXCHANGE (NSE). IN VIEW OF ABOVE DISCUSSION, IT IS HELD THAT DERIVATIVE TRANSACTIONS BEING SEPARATE FROM TRADING IN SHARES, THE PROVISIONS OF EXPLANATION TO SECTION 73 WILL NOT BE APPLICABLE TO SUCH TRANSACTIONS AND HENCE, THE LOSS INCURRED B Y THE ASSESSEE IN DERIVATIVE TRANSACTIONS THROUGH RECOGNIZED STOCK EXCHANGE HAS TO BE SET OFF AGAINST OTHER BUSINESS INCOME AS PER PROVISIONS OF THE ACT. WE, THEREFORE, SET ASIDE TH E ORDER OF THE LD. CIT (A) AND DECIDE THE APPEAL IN FAVOUR OF THE ASSESSEE. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH NOVEMBER, 2011. SD/- SD/- [ RAJPAL YADAV ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH NOVEMBER, 2011. *MEHTA * 13 I. T. APPEAL NO. 1446 (DEL) OF 2011 A N D I.T. A. NO. 2065 (DEL) OF 2011 . COPY OF THE ORDER FORWARDED TO : - 1. APPELLANTS. 2. RESPONDENTS. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REG ISTRAR, ITAT.