ADDL CIT CIR 21(1), MUMBAI V. PARIMAL D. NATHWANI, MUMBAI

ITA 3336/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8897 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-12-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 20-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Transactions in derivatives; Speculation loss
• Section: 43(5); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, MUMBAI BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 3336/MUM/2009 (ASSESSMENT YEAR: 2006-07) ACIT, CIRCLE 21(1) SHRI PARIMAL D. NATHWANI ROOM NO. 601, 6TH FLOOR 202, NEAR PARLE COLLEGE, YA SHIKA PARTYAKSHAKAR BHAVAN VS. 70 DIXIT ROAD, VILE PARLE (E) BKC, BANDRA (E), MUMBAI 400051 MUMBAI 400051 PAN - ABKPN 5258 N APPELLANT RESPONDENT APPELLANT BY: SHRI AJIT KUMAR SINHA RESPONDENT BY: S/SHRI VIPUL JOSHI & SAMEER DALAL O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) XXI, MUMBAI DATED 18.03.2009 IN WHICH THE REVENUE HAS RA ISED THE FOLLOWING GROUND: - 1. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PROFIT/LOS S MADE IN THE ELIGIBLE DERIVATIVE TRANSACTION DURING THE FINANCIA L YEAR BE ALLOWED A SHORT TERM CAPITAL GAIN/LOSS DELETING THE ADDITION MADE OF RS.29,64,671/- ON ACCOUNT OF COMMISSION. (II) THE LD. CIT(A) HAS FAILED TO APPRECIATE THE F ACT THAT THE PROFIT/LOSS EARNED PRIOR TO 24/1/2006 IN DERIVATIVE TRANSACTIONS SHOULD BE TREATED AS SPECULATIVE GAINS /LOSS AND PROFIT/LOSS MADE IN TRANSACTIONS IN DERIVATIVES AFT ER 25.1.2006 IS TO BE TREATED AS NON-SPECULATIVE IN VIEW OF THE NOTIFICATION ISSUED BY THE BOARD. 2. BRIEFLY STATED THE ASSESSEE IS A CONSULTANT AND REA L ESTATE AGENT. HE HAS FILED RETURN OF INCOME OFFERING INCOME FROM CON SULTANCY & BROKERAGE OF ` 2,48,46,172/-, SHORT TERM CAPITAL GAIN OF ` 89,28,352/- AND INCOMES FROM OTHER SOURCES OF ` 1,05,849/-. THE SHORT TERM CAPITAL GAINS INCLUDE DE RIVATIVE PROFIT IN FUTURE & OPTION OF ` 62,44,700/-. THE ASSESSEE SUBMITTED DURING THE ASSESSMENT PROCEEDINGS THAT THE INCOME FROM DERIVAT IVE TRANSACTION SHOULD BE TREATED AS SHORT TERM CAPITAL GAIN AND THERE IS NO DISPUTE ON THIS ISSUE ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 2 AFTER THE INSERTION OF CLAUSE (D) OF SECTION 43(5) OF INCOME TAX ACT AS ELIGIBLE TRANSACTIONS OF DERIVATIVE ARE NO MORE SPECULATIVE IN NATURE FROM A.Y. 2006- 07. THEREFORE, ACCORDING TO THE ASSESSEE IT SHOULD BE TREATED AS SHORT TERM CAPITAL GAIN AND TAXED ACCORDINGLY. THE ABOVE SUBMI SSIONS WERE NOT ACCEPTED BY THE A.O. THE A.O. HELD THAT AS PER NOTI FICATION ISSUED DATED 24.01.2006 PROFIT/LOSS EARNED PRIOR TO 24.01.2006 I N DERIVATIVE TRANSACTIONS SHOULD BE TREATED AS SPECULATIVE GAIN/LOSS AND PROF ITS & GAINS MADE IN TRANSACTIONS IN DERIVATIVES AFTER 25.01.2006 ARE NO T TO BE HELD AS SPECULATIVE. ACCORDING TO THE A.O. INSTRUCTIONS GIV EN VIDE CIRCULAR CLARIFIES THAT TRADING IN DERIVATIVES ONLY AFTER 25.01.2006 S HALL NOT BE DEEMED TO BE SPECULATIVE TRANSACTION. THEREFORE, THE A.O. TREATE D THE TRANSACTIONS ENTERED BEFORE 24.01.2006 AS SPECULATIVE TRANSACTIONS AND P ROFIT THERE ON WAS TREATED AS SPECULATIVE PROFITS. THE PROFITS MADE AF TER 25.01.2006 WERE TREATED AS NON-SPECULATIVE BUSINESS PROFITS IN THE BODY OF THE ORDER. 3. WHEN THE MATTER WAS CONTESTED BEFORE THE CIT(A), FO LLOWING THE ORDERS OF THE ITAT IN ASSESSEES OWN CASE IN EARLIER YEAR REGARDING DERIVATIVE TRANSACTION, HE HELD THAT THE TRANSACTIONS CANNOT B E HELD SPECULATIVE AND DECIDED THE ISSUE AS UNDER: - 4.3 I HAVE GONE THROUGH THE FACTS AND ARGUMENT ADV ANCED BY AR & ORDER OF CIT(A) & ITAT. SINCE THE ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE APPELLANTS OWN CASE IN EARLIER YEAR, RESPECTFULLY FOLLOWING THE DECISION OF ITAT, I HOLD THAT PROFIT/LOSS IN THE ELIGIBLE DERIVATIVE TRANSACTION DURING THE FINANCIA L YEAR 2005-06 BE ALLOWED AS SHORT TERM CAPITAL GAIN. ACCORDINGLY, TH E APPEAL IS DECIDED IN FAVOUR OF THE APPELLANT. THE ASSESSING OFFICER IS D IRECTED TO ALLOW THE CLAIM OF THE APPELLANT THAT PROFIT/LOSS EARNED IN D ERIVATIVE (F&O) TRANSACTION OF RS.62,44,700/- (1795050+4539650) RES ULTS IN EARNING OF SHORT TERM CAPITAL GAINS. 4. THE LEARNED D.R. SUBMITTED THAT THE ISSUE IS COVERE D BY THE SPECIAL BENCH DECISION IN THE CASE OF SHREE CAPITAL SERVICE S IN ITA NO. 1294 (KOL) OF 2008 WHEREIN IN WAS HELD THAT THE TRANSACTIONS ARE TO BE TREATED AS SPECULATIVE IN NATURE AND SINCE THE NOTIFICATION HA S COME ON 25.01.2006 THE ELIGIBLE TRANSACTIONS TO BE EXEMPTED OR TO BE CONSI DERED WITH REFERENCE TO THE CUT OFF DATE 25.01.2006, THEREFORE THE TRANSACTIONS BEFORE 25.01.2006 ARE SPECULATIVE IN NATURE. ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 3 5. THE LEARNED A.R., HOWEVER, SUBMITS THAT SIMILAR ISS UE WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF G.K. ANAND BROS . BUILDWELL (P.) LTD. VS. INCOME TAX OFFICER 234 SOT 439 (DEL) WHEREIN THE CO ORDINATE BENCH HAS CONSIDERED THE NOTIFICATION AND FOLLOWED THE FINDIN G IN THE CASE OF SHREE CAPITAL SERVICES LTD. (SUPRA) HELD THAT THE TRANSACTION FRO M 01.04.05 CAN NOT BE SPECULATIVE CONSEQUENCE TO THE AMENDMENT W.E.F. 01. 04.06 AND RELIED ON THE ORDERS OF THE COORDINATE BENCH IN EARLIER YEAR. 6. WE HAVE CONSIDERED THE ISSUE. THE INTERESTING ISSUE ARISING IN THIS APPEAL WAS THAT THE ASSESSEE OFFERED THE INCOME ON FUTURES AND OPTIONS OF THE DERIVATIVES UNDER THE HEAD CAPITAL GAINS WHIC H THE A.O. IN THE BODY OF THE ORDER DISCUSSED ELABORATELY AND TREATED IT AS B USINESS INCOME. DURING THE YEAR THERE IS AN AMENDMENT TO CLAUSE (D) OF SECTION 43(5) WHEREIN THE FOLLOWING WAS INTRODUCED W,E,F, 1 ST APRIL, 2006: - (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE [(AC)] OF SECTION 2 OF THE SE CURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE; SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, THE E XPRESSIONS (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 INTERMED IARY REGISTERED UNDER SECTION 12 OF THE SECURITIES AND E XCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (REGULAT ION) ACT, 1956 (42 OF 1956) OR THE SECURITIES AND EXCHANGE BO ARD OF INDIA ACT, 1992 (15 OF 1992) OR THE DEPOSITORIES AC T, 1996 (22 OF 1996) AND THE RULES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BANKS OR M UTUAL 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 AN Y 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 SECTION 2 OF THE SE CURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFI LS SUCH ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 4 CONDITIONS AS MAY BE PRESCRIBED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE AS PER THE ABOVE AMENDMENT BROUGHT ON STATUTE W.E.F . 1 ST APRIL 2006, THE ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIV ATIVES SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THERE IS NO DOUBT ABO UT THE FACT THAT THE ASSESSEE HAS UNDERTAKEN A TRANSACTION IN DERIVATIVE S IN FUTURES AND OPTIONS IN THE STOCK EXCHANGE. THESE TRANSACTIONS ARE SPECU LATIVE IN NATURE. THE HON'BLE SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES VS. ACIT 318 ITR (AT) 1 (KOL) HAS CONSIDERED SPECULATIVE TRANSACTION AND THE EFFECT OF THE AMENDMENT BROUGHT W.E.F. 01.04.2006 ON THE TRANSACT IONS PRIOR TO THAT PERIOD AND HELD AS UNDER: - A SPECULATIVE TRANSACTION IS A TRANSACTION IN WHIC H A CONTRACT FOR PURCHASE AND SALE OF ANY COMMODITY IS SETTLED OTHER WISE THAN BY ACTUAL DELIVERY. DUE TO TECHNOLOGICAL ADVANCEMENT, ONE HAS TO CHANGE ONES THINKING ABOUT VARIOUS CONCEPTS LIKE GOODS, MERCHANDISE AND ARTICLES. THIS WOULD BE SQUARELY APPLICABLE WHILE INTERPRETING THE WORD COMMODITY IN SECTION 43(5) OF THE INCOME-TAX ACT, 1961. THERE FORE, EVEN IF IN COMMON PARLANCE THE TERM COMMODITY MAY NOT INCLUD E ANY STOCKS AND SHARES, THE LEGISLATURE FOR THE PURPOSE OF SECT ION 43(5) PROVIDED THAT THE TERM COMMODITY WOULD INCLUDE STOCKS AND SHARES. THIS MAKES THE INTENTION OF THE LEGISLATURE CLEAR THAT T HEY USED THE TERM COMMODITY IN A VERY WIDE MANNER. SECTION 43(5) WA S BROUGHT ON THE STATUTE WHEN THERE WAS NO CONCEPT OF TRADING IN DER IVATIVES. DERIVATIVES ARE ALSO SECURITIES. DERIVATIVES DERIVE THEIR VALUE FROM THE UNDER-LYING ASSETS. IN OTHER WORDS, THE UNDERLYING ASSETS ARE REPRESENTED BY THE DERIVATIVES. WHEN THE UNDERLYING ASSET OF ANY DERIVATIVE IS SHARES AND STOCK FOR ALL PRACTICAL PU RPOSES, THE TREATMENT GIVEN TO SUCH DERIVATIVES SHOULD BE SIMILAR TO STOC K AND SECURITIES. THEREFORE, DERIVATIVES WILL ALSO FALL WITHIN THE ME ANING OF COMMODITY USED IN SECTION 43(5). THE FINANCE ACT, 2005 HAS PROVIDED CERTAIN TRANSACT IONS IN RESPECT OF TRADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE SP ECULATIVE TRANSACTIONS WITHIN THE MEANING OF SECTION 43(5). I F THE TRANSACTION IN DERIVATIVES DID NOT FALL WITHIN THE DEFINITION OF SPECULATION TRANSACTION UNDER SECTION 43(5), THERE WAS NO QUES TION OF EXEMPTING CERTAIN TYPES OF TRANSACTION IN DERIVATIVES FROM TH E SCOPE OF SPECULATIVE TRANSACTION UNDER SECTION 43(5) AND CLAUSE (D) AND EXPLANATION THERETO BELOW SECTION 43(5) INTRODUCED BY THE FINANCE ACT, 2005 WOULD BE REDUNDANT. THE TERM DERIVATIVES IN WHICH THE UNDE RLYING ASSET IS SHARES, WILL FALL WITHIN THE MEANING OF COMMODITY USED IN SECTION 43(5) OF THE ACT. CLAUSE (D) OF SECTION 43(5) IS PR OSPECTIVE IN NATURE AND WILL BE EFFECTIVE FROM THE DATE ON WHICH THE LEGISL ATURE MADE IT ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 5 EFFECTIVE, I.E. APRIL 1, 2006 AND WILL BE APPLICABL E TO THE ASSESSMENT YEAR 2006-07 ONWARDS. WHERE THE ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF FINANCING AND INVESTMENTS IN SHARES AND SECURITIES, SUFFERED LOSS ON ACCOUNT OF FUTURES AND OPTIONS, DURING THE ASSESSMENT YEAR 200 4-05: HELD ACCORDINGLY , DISMISSING THE APPEAL, THAT THE TRANSACTION IN DERIVATIVES WAS A SPECULATIVE TRANSACTION AS PROVID ED UNDER SECTION 43(5) AND THE TRANSACTION IN DERIVATIVES WAS NOT EX EMPTED FROM THE PURVIEW OF SPECULATIVE TRANSACTION UNDER SECTION 53 (5) AND THE ASSESSING OFFICER WAS RIGHT IN TREATING THE LOSS AS SPECULATION LOSS IN TERMS OF SECTION 43(5) OF THE INCOME-TAX ACT, 1961. IF IT IS A NECESSARY IMPLICATION FROM THE LANGUAGE EMPLOYED THAT THE LEGISLATURE INTENDED A PARTICULAR SECTION TO HAVE R ETROSPECTIVE OPERATION, THE COURT WILL GIVE IT SUCH AN OPERATION . 7. ACCORDINGLY, EVENTHOUGH THE UNDERLYING ASSETS ARE S HARES AND SECURITIES, THE DERIVATIVES TRANSACTION IS PRIMARIL Y A SPECULATIVE TRANSACTION. THE INCOME OR LOSS THEREAFTER ARISING FROM SUCH SPE CULATIVE TRANSACTIONS ARE GOVERNED BY SECTION 43(5) R.W. EXPLANATION TO SECTI ON 28. THE PROVISIONS OF SECTION 43(5) ARE AS UNDER: - (5) SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING ST OCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y 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 MERC HANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR M ERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUAT IONS 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 ENT ERED 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 FORWA RD MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER FROM THE ABOVE, IT IS CLEAR THAT THE SPECULATIVE TR ANSACTION IS A TRANSACTION IN WHICH CONTRACT FOR PURCHASE AND SALE OF ANY COMMODI TY IS SETTLED OTHERWISE THAN ACTUAL DELIVERY. IT IS NOT IN DISPUTE THAT IN THE CASE OF TRANSACTION IN DERIVATIVES THE TRANSACTION IS ALWAYS OTHERWISE THA N ON ACTUAL DELIVERY. IN VIEW OF THIS, THE TRANSACTIONS IN DERIVATIVES ARE T O BE CONSIDERED AS ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 6 SPECULATIVE IN NATURE. ACCORDINGLY, THEY ARE TO BE CONSIDERED AS BUSINESS TRANSACTIONS ONLY. 8. BY THE VERY NATURE, THE ASSESSEE CHOOSING TO ENTER INTO TRANSACTIONS IN DERIVATIVES ITSELF HAS TO BE CONSIDERED AS ADVENTUR E IN THE NATURE OF TRADE. NOBODY CAN SAY THAT ASSESSEE HAS ENTERED INTO FUTUR ES AND OPTIONS CONTRACT WITH THE INTENTION OF MAKING INVESTMENTS. EVEN IF A SINGLE TRANSACTION IS UNDERTAKEN, WHICH IS IN THE REALM OF SPECULATION IT CANNOT BE CONSIDERED AS INVESTMENT. WHEN ONE UNDERTAKES PURCHASE AND SALE O F SHARES DIRECTLY OR IN THE STOCK MARKET, THE PURCHASE CAN BE FOR THE PURPO SE OF INVESTMENT OR FOR THE PURPOSE OF TRADING DEPENDING ON THE INTENTION O F THE ASSESSEE AT THE TIME OF ENTERING INTO THE TRANSACTION. AS FAR AS THE DER IVATIVES TRANSACTIONS ARE CONCERNED THERE IS NO PURCHASE OR SALE OF ASSETS DI RECTLY BUT ONLY UNDERLYING SECURITIES BY WAY OF FUTURES AND OPTIONS, AS THERE IS NO DELIVERY INVOLVED IN THESE TRANSACTIONS. IN VIEW OF THIS, EVEN THOUGH DE RIVATIVES DERIVE ITS VALUE FROM UNDERLYING ASSETS, BY VERY DEFINITION OF DERIV ATIVES TRANSACTIONS IT IS SPECULATIVE IN NATURE. BEFORE THE AMENDMENT BROUGHT OUT BY THE I.T. ACT W.E.F. 01.04.2006, ALL THE TRANSACTIONS IN DERIVATI VES ARE INVARIABLY TREATED AS SPECULATIVE IN NATURE AND ACCORDINGLY THE SET OFF O F INCOMES AND LOSSES ARE DEALT WITH SPECIFICALLY TREATING THEM AS SPECULATIV E PROFITS OR LOSSES. HOWEVER, W.E.F. 01.04.2006, CONSEQUENT TO THE AMENDMENT BROU GHT OUT TO THE PROVISIONS OF SECTION 43(5), THE TRANSACTIONS INVOL VING DERIVATIVES HAVE BEEN TAKEN OUT OF THE PURVIEW OF SPECULATIVE TRANSACTION S. THE HON'BLE SPECIAL BENCH IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS . ACTI 318 ITR (AT) 1 (KOL) DECIDED THE ISSUE AND HELD THAT THE AMENDMENT IS PR OSPECTIVE IN NATURE AND THOSE TRANSACTIONS ARE TO BE CONSIDERED AS SPECULAT IVE IN NATURE WHICH ARE ENTERED PRIOR TO AY 2005-06 AND THEY CANNOT BE CONS IDERED AS SPECULATIVE IN NATURE AFTER AY 2006-07 AS PER THE AMENDMENTS BROUG HT TO THE ACT. IN VIEW OF THESE FINDINGS OF THE SPECIAL BENCH, WE ARE UNAB LE TO AGREE WITH THE ORDER OF THE CIT(A) THAT THE INCOME DERIVED FROM THE TRAN SACTIONS OF DERIVATIVES, PARTICULARLY IN FUTURES AND OPTIONS ARE TO BE TAXED UNDER THE HEAD CAPITAL GAINS. SINCE THE ASSESSEE HAS NOT TAKEN DELIVERY, THE QUESTION OF TREATING THE TRANSACTIONS AS INVESTMENT DOES NOT ARISE AND THESE TRANSACTIONS ARE TO BE CONSIDERED UNDER THE HEAD PROFITS AND GAINS OF BUS INESS. TO THAT EXTENT THE ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 7 ORDER OF THE CIT(A) IS TO BE REVERSED. INTERESTINGL Y BOTH THE COUNSELS RELIED ON THE DECISIONS GIVEN IN THE CONTEXT OF TREATING THE INCOME AS BUSINESS IN NATURE. PROVISIONS OF SEC 43(5) APPLY IN THE CONTEX T OF COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS ONLY . 9. AS SEEN FROM THE ORDER OF THE CIT(A), HE HAD FOLLOW ED THE EARLIER YEAR ORDER. THE SAME WAS ALSO UPHELD BY THE ITAT IN ITA NO. 6909/MUM/2006, WHICH WAS DECIDED EXPARTE ASSESSEE ON THE BASIS OF THE CIT(A)S FINDING IN THE REVENUE APPEAL. HOWEVER, SINCE THE DECISION WAS PRI OR TO THE DECISION OF THE SPECIAL BENCH AND SINCE THE TRANSACTIONS IN DERIVAT IVES ARE BASICALLY SPECULATIVE TRANSACTIONS, WE ARE OF THE OPINION THA T THE CIT(A)S ORDER ON THIS ISSUE IS NOT CORRECT AND ACCORDINGLY THE SAME IS RE VERSED AND THE REVENUES GROUND NO. 1 IS ALLOWED. 10. THE ISSUE IN GROUND NO. 2 IS WITH REFERENCE TO THE EFFECTIVE DATE FOR TREATING THE TRANSACTIONS AS NON-SPECULATIVE. 11. IT IS THE CONTENTION OF THE REVENUE THAT THE NOTIFI CATION WAS ISSUED ON 24.01.2006 AND ACCORDINGLY THE TRANSACTIONS EFFECTE D PRIOR TO 24.01.2006 ARE TO BE CONSIDERED AS SPECULATIVE TRANSACTIONS AND TH E TRANSACTIONS AFTER THAT DATE CAN BE CONSIDERED AS NON-SPECULATIVE, IN VIEW OF THE NOTIFICATION ISSUED BY THE BOARD. THE COORDINATE BENCH IN THE CASE OF G.K. ANAND BROS. BUILDWELL (P.) LTD. VS. INCOME TAX OFFICER 234 SOT 439 (DEL) HAS CONSIDERED THE ISSUE AND HELD THAT NOTIFICATION DATED 24.01.20 06 IS BY WAY OF A SUBORDINATED LEGISLATION BUT CANNOT OVERRIDE THE PR INCIPAL LEGISLATION ENACTED BY THE PARLIAMENT. THEREFORE THE LOSS IN QUESTION W AS TO BE TREATED AS BUSINESS LOSS AND NOT AS SPECULATIVE LOSS IN THE AB OVE SAID CASE. THE FACTS AND REASONS FOR HOLDING AS SUCH ARE AS UNDER:- THE ASSESSEE IS CARRYING ON BUSINESS AS BUILDER, D EVELOPER AND CONTRACTOR. DURING THE YEAR IT HAS ALSO DONE TRADIN G IN SHARES BY WAY OF FUTURE AND OPTION TRANSACTIONS. THIS RESULTED INTO A LOSS OF RS. 20,36,328, THE AO WAS OF THE OPINION THAT LOSS IN F UTURE AND OPTION SEGMENT IS TO BE CONSIDERED AS SPECULATION LOSS IN TERMS OF S. 43(5) R/W EXPLANATION TO S. 73. THE ASSESSEE SUBMITTED THAT T HE TRANSACTIONS ARE CARRIED ON THROUGH A BROKER M/S MARCK SECURITIES (P ) LTD. WHO IS A REGISTERED MEMBER OF NATIONAL STOCK EXCHANGE. THE S PECULATIVE TRANSACTION IS DEFINED IN S. 43(5). CLAUSE (D) OF T HE PROVISO TO S. 43(5) PROVIDES, 'AN ELIGIBLE TRANSACTION IN RESPECT OF TR ADING IN DERIVATIVES REFERRED TO IN SECURITIES CONTRACTS (REGULATION) AC T, 1956 CARRIED OUT IN A ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 8 RECOGNIZED STOCK EXCHANGE, SHALL NOT BE DEEMED TO B E A SPECULATIVE TRANSACTION'. THE PHRASES 'ELIGIBLE TRANSACTION' AS ALSO 'RECOGNIZED STOCK EXCHANGE' IS DEFINED IN EXPLANATION BELOW THE PROVI SO TO S. 43(5). IT WAS ALSO NOTED THAT CL. (D) IS INSERTED IN THE PROVISO BY FINANCE ACT, 2005 W.E.F. 1ST APRIL, 2006. ACCORDINGLY, FOR ASST. YR. 2006-07 THE TRANSACTION IN THE DERIVATIVES IN THE FORM OF FUTURE AND OPTION CANNOT BE CONSIDERED AS SPECULATIVE TRANSACTION AND HENCE LOSS IN SUCH T RANSACTION CANNOT BE CLASSIFIED AS LOSS IN SPECULATION BUSINESS. THE AO HELD, THAT THE TRANSACTIONS ARE CARRIED ON AT NATIONAL STOCK EXCHA NGE AND BOMBAY STOCK EXCHANGE. BOMBAY STOCK EXCHANGE LTD. AND NATI ONAL STOCK EXCHANGE OF INDIA LTD. ARE RECOGNIZED STOCK EXCHANG ES AS PER NOTIFICATION DT. 25TH JAN., 2006. THEREFORE THE TRA NSACTIONS IN F&O SEGMENT PRIOR TO 25TH JAN., 2006 ARE REGARDED AS SP ECULATIVE LOSS. SEC. 43(5) DEFINED SPECULATIVE TRANSACTION MEAN S A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY CO MMODITY INCLUDING STOCKS AND SHARES IS PERIODICAL OR ULTIMATELY SETTL ED OTHERWISE THAN BY THE ACTUAL DELIVERY OR THE TRANSFER OF COMMODITY OR SCRIPS. PROVISO BELOW S. 43(5) CARVES OUT EXCEPTIONS TO S. 43(5). AS PER CL. (D) OF THE SAID PROVISO 'AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN D ERIVATIVES REFERRED IN SECURITIES CONTRACTS (REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULAT IVE TRANSACTION'. CLAUSE (D) IN THE PROVISO WAS INSERTED BY FINANCE A CT, 2005 W.E.F. 1ST APRIL, 2006. THEREFORE, IF A TRANSACTION FALLS WITH IN CL. (D) OF THE PROVISO WILL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION IN RESPECT OF TRANSACTION PERTAINING TO ASST. YR. 2006-07. UNDER CL. (D) OF THE PROVISO, A TRANSACTION IS NOT A SPECULATIVE TRANSACTION PROVID ED IT IS AN ELIGIBLE TRANSACTION WITHIN THE MEANING OF CL. (I) OF EXPLAN ATION AND IT IS CARRIED ON AT RECOGNIZED STOCK EXCHANGE AS EXPLAINED IN CL. (II) OF THE SAID EXPLANATION BELOW PROVISO TO S. 43(5)(D). THE RECOG NIZED STOCK EXCHANGE MEANS A RECOGNIZED STOCK EXCHANGE AS NOTIFIED BY TH E CENTRAL GOVERNMENT FOR THIS PURPOSE. THEREFORE, EVEN IF THE NOTIFICATION IS FROM A PARTICULAR DATE, AS PER CL. (D) INSERTED, THE SAME WILL APPLY TO ALL THE TRANSACTIONS IN RELATION TO ASST. YR. 2006-07 AND O NWARDS. CLAUSE (D) DOES NOT MENTION THAT UNLESS THE RECOGNIZED STOCK E XCHANGE IS NOTIFIED, THE TRANSACTION WILL NOT BE DEEMED TO BE A SPECULAT IVE TRANSACTION. THE POWER TO NOTIFY THE STOCK EXCHANGE IS GRANTED UNDER THE STATUTE AND HENCE ONCE THE RECOGNIZED STOCK EXCHANGE IS NOTIFIE D, THE SAME WILL APPLY IN RESPECT OF ALL ELIGIBLE TRANSACTIONS CARRI ED OUT IN RELATION TO FINANCIAL YEAR RELEVANT TO ASST. YR. 2006-07 AND ON WARDS. THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF SHREE CAPITAL SERV ICES LTD. (SUPRA) IN PARA 7 HELD THAT 'CL. (D) OF S. 43(5) IS PROSPECTIV E IN NATURE AND WILL BE EFFECTIVE FROM THE DATE FROM WHICH THE LEGISLATURE MADE IT EFFECTIVE, I.E., 1ST APRIL, 2006 AND WILL BE APPLICABLE TO ASST. YR. 2006-07 ONWARDS'. THE NOTIFICATION IS BY WAY OF A SUBORDINATED LEGISLATIO N BUT CANNOT OVERRIDE THE PRINCIPAL LEGISLATION ENACTED BY THE PARLIAMENT . IT ONLY CLARIFIES BUT WILL NOT OVERRIDE UNLESS STATUTORILY SO PRESCRIBED. SINCE THERE IS NO DISPUTE TO THE FACT THAT THE TRANSACTIONS IN THE PR ESENT CASE IN F&O SEGMENT ARE THE ELIGIBLE TRANSACTIONS CARRIED OUT I N A RECOGNIZED STOCK EXCHANGE, LOSS IN SUCH TRANSACTIONS CANNOT BE DEEME D TO BE TRANSACTION ITA NO. 3336/MUM/2009 SHRI PARIMAL D. NATHWANI 9 IN SPECULATION BUSINESS. THE SAME BEING CONSIDERED AS REGULAR BUSINESS TRANSACTION, LOSS INCURRED IN THE SAME IS TO BE TRE ATED AS BUSINESS LOSS AND NOT LOSS IN SPECULATION BUSINESS. 12. IN VIEW OF THIS, RESPECTFULLY FOLLOWING THE SAME WE ARE OF THE OPINION THAT THERE IS NO MERIT IN GROUND NO. 2 RAISED BY TH E REVENUE. ACCORDINGLY GROUND NO. 2 IS REJECTED AND A.O. IS DIRECTED TO TR EAT THE PROFIT/LOSS ON DERIVATIVES AS NON-SPECULATIVE BUSINESS PROFITS AS PER THE PROVISIONS OF THE ACT EFFECTIVE FROM 01.04.2006. 13. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JANUARY 2011. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 21 ST JANUARY 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXI, MUMBAI 4. THE CIT XXI, MUMBAI CITY 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.