The ACIT, Circle-2, Bhavnagar V. Shri Hiren Jaswantrai Shah, Bhavnagar

ITA 3361/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6422 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 22-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMIR TEKRIWA LA
• Assessee Lawyers: MEHUL K PATEL
• Keywords: Business income; Transactions in derivatives; Retrospective amendment; Speculation loss
• Section: 43(5); 12

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M ASSTT. CIT, CIRCLE-2, BHAVNAGAR. VS. SHRI HIREN JASWANTRAI SHAH, PROP. OF HETAL STEEL CORPORATION, 940/B KRISHNANAGAR, BHAVNAGAR. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI SAMIR TEKRIWALA, SR.DR RESPONDENT BY:- SHRI MEHUL K. PATEL, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUNDS :- 1. THE LD. CIT(A) AHMEDABAD HAS ERRED IN LAW AND O N FACTS IN HOLDING THAT THE DERIVATIVE TRANSACTIONS ARE BUSINESS TRANSACTIONS W HICH CANNOT BE TREATED AS SPECULATIVE TRANSACTION AND THEREBY DIRECTING THE A O TO ALLOW THE SET OFF OF LOSS IN DERIVATIVE TRANSACTIONS OF RS,23,62,200/- A GAINST THE REGULAR BUSINESS INCOME. WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE AO. 1.2 IN DOING SO, THE LD. CIT(A) HAS ERRED IN LAW A ND ON FACTS IN NOT APPRECIATING THAT THE ASSESSEE COULD NOT ESTABLISH AS TO HOW THE CONDITIONS LAID DOWN IN SECTION 43(5) WERE FULFILLED IN ASSESSEE'S CASE AND WHETHER THE TRANSACTIONS HAD BEEN MADE THROUGH THE RECOGNIZED STOCK EXCHANGE AND WHETHER THE SAME WERE ELIGIBLE TRANSACTIONS WITHIN THE MEANING OF THE PROVISIONS OF THE SAID SECTION. 2. THE ONLY ISSUE INVOLVED IN THE APPEAL IS WHETHER PROFIT ARISING FROM DERIVATIVE TRANSACTIONS AT RS.23,62,290/- SHOULD BE TREATED AS NON- ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 2 SPECULATIVE AND ACCORDINGLY AVAILABLE TO BE SET OFF AGAINST REGULAR BUSINESS INCOME. 3. THE FACTS RELATING TO THE ISSUE ARE THAT ASSESSE E IS ENGAGED IN THE WHOLE-SALE BUSINESS OF IRON AND STEEL. HE IS ALSO C ARRYING OUT DAILY TRANSACTIONS IN SHARES. HE HAS MADE INVESTMENT IN S HARES, AND ALSO TRADING IN SHARES & SECURITIES AND MONEY LENDING. THE ASSES SEE HAS SHOWN INCOME FROM LONG TERM CAPITAL GAINS/SHORT TERM CAPI TAL GAINS FROM SHARES. DURING THE ASST. YEAR IN QUESTION ASSESSEE HAS SHOW N LOSS FROM DERIVATIVE TRANSACTIONS AT RS.23,62,290/- WHICH IS SOUGHT TO BE ADJUSTED AGAINST NORMAL BUSINESS INCOME. THE AO DISALLOWED T HE CLAIM ON THE GROUND THAT GOVERNMENT NOTIFICATION FOR TREATING IN COME/LOSS FROM DERIVATIVE TRANSACTIONS IN SHARES AS REGULAR BUSINE SS INCOME/LOSS IS ISSUED ON 25.01.2006 UNDER EXPLANATION TO SECTION 43(5). T HEREFORE, SUCH LOSS CANNOT BE TREATED AS FROM NON-SPECULATIVE TRANSACTI ON. THE AO ACCORDINGLY DISALLOWED THE CLAIM OF SET OFF. 4. THE LD. CIT(A) ALLOWED THE CLAIM AS UNDER :- 3.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, TH E LD. COUNSEL FOR THE APPELLANT HAS SUBMITTED THAT NO VALID COGENT, TENAB LE GROUNDS FOR SUCH TREATMENT/DISALLOWANCE ARE SHOWN AT ALL BY THE AO F OR TREATING THE LOSS OF RS.23,62,290/- AS SPECULATIVE LOSS INSTEAD OF REGUL AR BUSINESS LOSS CLAIMED BY THE ASSESSEE. THE ASSESSEE OUGHT TO HAVE BEEN ALLOWED THE SET OFF OF SUCH LOSS AGAINST HIS BUSINESS INCOME IN VIE W OF DECISION OF THE HON. ITAT IN THE APPELLANTS OWN CASE FOR ASST. YEA R 2005-06 WHERE THE SIMILAR ISSUE WAS INVOLVED AND THE HON. ITAT HAS AL LOWED THE SET OFF OF THE DERIVATIVE TRANSACTIONS AGAINST THE REGULAR BUS INESS INCOME. THE LD. ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 3 COUNSEL HAS ALSO RELIED ON THE DECISION OF HON. ITA T, JAIPUR A BENCH IN THE CASE OF P.S. KAPUR VS. ACIT IN ITA NO.214/JP /2008 DATED 31.07.2008 (2009) 120 TTJ 422 WHEREIN THE SIMILAR ISSUE WAS INVOLVED AND THE APPEAL OF THE ASSESSEE IS ALLOWED. THEREFOR E, THE LD. COUNSEL FOR THE APPELLANT URGED TO ALLOW THE SET OFF OF LOSS IN DERIVATIVE TRANSACTION OF RS.23,62,290/- AGAINST THE REGULAR BUSINESS INCOME. 3.3 I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE LD. COUNSEL FOR THE APPELLANT AND HAVE ALSO CAREFULLY GONE THROUGH THE ASSESSMENT ORDER. THE CASE LAW RELIED UPON BY THE LD. COUNSEL FOR THE APPELLANT HAS ALSO BEEN CAREFULLY CONSIDERED. IT IS SEEN IN THIS CASE THAT THE AO HAS NOT COME WITH ANY ADVERSE FINDINGS AS REGARDS THE LOSS CLAIM ED BY THE APPELLANT ON DERIVATIVE TRANSACTIONS. IT IS NOW VERY CLEAR THAT DERIVATIVE TRANSACTIONS ARE BUSINESS TRANSACTIONS AND CANNOT BE TREATED AS SPECULATIVE TRANSACTIONS. IN VIEW OF THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS CITED SUPRA OF THE HON. AHMEDABAD AND JAIPUR TRIBUNALS, THE AO IS DIRECTED TO ALLOW THE S ET OFF OF LOSS IN DERIVATIVE TRANSACTIONS OF RS.23,62,290/- AGAINST R EGULAR BUSINESS INCOME AS THE SAME IS TO BE TREATED AS BUSINESS LOSS ONLY. 5. BEFORE US, THE LD. DR SUBMITTED THAT AS PER CLAU SE (II) OF EXPLANATION BELOW SECTION 43(5) NOTIFICATION FOR DE CLARING AS TO WHAT ARE THE RECOGNIZED STOCK EXCHANGES THROUGH WHICH ASSESS EE CAN CARRY OUT DERIVATIVE TRANSACTIONS WAS PUBLISHED ON 25.1.2006 AND, THEREFORE, THE ASSESSEE COULD NOT CARRY OUT DERIVATIVE TRANSACTION S THROUGH RECOGNIZED STOCK EXCHANGES PRIOR TO THIS DATE AS REQUIRED UNDE R THAT CLAUSE (II) OF EXPLANATION TO SECTION 43(5) AND, THEREFORE, TRANSA CTIONS CARRIED OUT PRIOR TO THIS DATE WOULD BE SPECULATIVE TRANSACTIONS AND ACCORDINGLY THE LOSS IN THEM CANNOT BE SET OFF AGAINST NORMAL BUSINESS INCO ME. 6. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT THI S NOTIFICATION IS CLARIFICATORY IN NATURE. RECOGNIZED STOCK EXCHANGES ARE ALREADY IN ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 4 EXISTENCE EVEN PRIOR TO 25.1.2006. HE RELIED ON THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL, KOLKATA, IN THE CASE OF SHRE E CAPITAL SERVICES LTD. VS. ACIT (2009) 318 ITR (AT) 01, ITAT, KOLKATA (SB) WHEREIN IT IS HELD THAT CLAUSE (D) OF SECTION 43(5), DEFINING SPECIAL TRANSACTIONS IN DERIVATIVES, WOULD BE PROSPECTIVE IN NATURE AND WOU LD BE EFFECTIVE FROM 1 ST APRIL, 2006. 7. WE HAVE HEARD THE RIVAL ARGUMENTS AND PERUSED TH E MATERIAL ON RECORD. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS W HETHER BY VIRTUE OF NOTIFICATION FROM CBDT DATED 25.1.2006 IN S.O.(89E) RECOGNIZING NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE F OR THE PURPOSE OF DERIVATIVE TRANSACTIONS WOULD MAKE THE APPLICATION OF CLAUSE (D) OF SECTION 43(5) EFFECTIVE ONLY FROM 25.1.2006 OR THIS PROVISION WILL REMAIN IN EFFECT FROM 1 ST APRIL, 2006 WHEN THE CLAUSE (D) OF SUB-SECTION (5) WAS BROUGHT INTO STATUTE. FOR THE SAKE OF CONVENIENCE W E REPRODUCE SECTION 43(5), (WHICH INCLUDES CLAUSE (D) ALSO WHICH WAS IN TRODUCED BY THE FINANCE ACT, 2005 W.E.F. 1.4.2006) 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 PERIODICA LLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODIT Y OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE-- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHAN DISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINE SS 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 INT O BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS A ND SHARES THROUGH PRICE FLUCTUATIONS ; OR ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 5 (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD M ARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBIN G OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH M EMBER ; OR (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AA) OF SECTION 2 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 ; EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, THE EXPR ESSIONS (I) ELIGIBLE TRANSACTION MEANS ANY TRANSACTION, (A) CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYSTEMS TH ROUGH A STOCK BROKER OR SUB- BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UNDER S ECTION 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992), IN ACCORDANCE WI TH THE PROVISIONS OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), OR TH E SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992, OR THE DEPOSITORIES ACT, 1996 (22 OF 1996) AND THE RULES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BANKS OR MUTUAL FUNDS ON A RECOGNISED STOCK EXCHANGE ; AND (B) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE I SSUED BY SUCH STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY TO EVERY CLIE NT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY ACT R EFERRED TO IN SUB-CLAUSE (A) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT ; (II) RECOGNISED STOCK EXCHANGE MEANS A RECOGNISED STO CK 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 B Y THE CENTRAL GOVERNMENT FOR THIS PURPOSE. IN DERIVATIVE TRANSACTIONS THERE IS NO PURCHASE OR SALE DIRECTLY. THESE INSTRUMENTS, HOWEVER, DEPEND UPON ORIGINAL ASSETS A ND DERIVE THEIR VALUE FROM THEM. SUCH DERIVATIVES ARE IN THE FORM OF FUTU RE AND OPTIONS. BEFORE THE AMENDMENT BROUGHT IN BY THE IT ACT W.E.F. 1.4.2 006 IN SECTION 43(5), ALL THE TRANSACTIONS IN DERIVATIVES WERE TREATED AS SPECULATIVE IN NATURE AND, THEREFORE, LOSSES ARISING THEREIN COULD NOT BE ALLOWED TO BE SET OFF AGAINST OTHER BUSINESS INCOME. HOWEVER, W.E.F. 1.4. 2006 AMENDMENTS WERE MADE IN SECTION 43(5) AND THE TRANSACTIONS INV OLVED IN DERIVATIVES WERE TAKEN OUT OF DEFINITION OF SPECULATIVE TRANSAC TIONS. FOR THIS PURPOSE ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 6 CLAUSE(D) WAS INSERTED IN SECTION 43(5). THIS AMEND MENT WAS HELD PROSPECTIVE IN NATURE AND APPLICABLE FROM ASST. YEA R 2006-07 AS HELD BY THE SPECIAL BENCH IN SHREE CAPITAL SERVICES LTD. VS .ACIT (SUPRA) AS UNDER :- THE FINANCE ACT, 2005 HAS PROVIDED THAT CERTAIN TR ANSACTIONS IN RESPECT OF TRADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE SPECULATIVE TRANSACTIONS- WITHIN THE MEANING OF SECTION 43(5). IF THE TRANSACTION IN DERIVATIVES DID NOT FALL WITHIN THE DEFINITION OF ' SPECULATION TRANSACTION' UNDER SECTION 43(5), THERE WAS NO QUESTION OF EXEMP TING CERTAIN TYPES OF TRANSACTION IN DERIVATIVES FROM THE SCOPE OF SPECUL ATIVE TRANSACTION UNDER SECTION 43(5) AND CLAUSE (D) AND EXPLANATION THERET O BELOW SECTION 43(5) INTRODUCED BY THE FINANCE ACT, 2005 WOULD BE REDUND ANT. THE TERM 'DERIVATIVES' IN WHICH THE UNDERLYING ASSET IS SHAR ES, WILL FALL WITHIN THE MEANING OF 'COMMODITY' USED IN SECTION 43(5) OF THE ACT. CLAUSE (D) OF SECTION 43(5) CANNOT BE SAID TO BE CLARIFICATORY IN NATURE. CLAUSE (D) OF SECTION 43(5) IS PROSPECTIVE IN NATURE AND WILL BE EFFECTIVE FROM THE DATE ON WHICH THE LEGISLATURE MADE IT EFFECTIVE, I.E., A PRIL 1,2006 AND WILL BE APPLICABLE TO THE ASSESSMENT YEAR 2006-07 ONWARDS. 8. THIS VIEW WAS UPHELD BY HON. BOMBAY HIGH COURT I N THE CASE OF CIT IV, MUMBAI VS. SHRI BHARAT R. RUIA (HUF) (2011 ) 10 TAXMANN.CO, 265 (BOM) PRONOUNCED ON APRIL 18,2011 WHILE INTERPR ETING CLAUSE (D) TO THE PROVISO TO SECTION 43(5) (THAT IT IS EFFECTIVE FROM 1.4.2006) AS UNDER:- PLAIN READING OF CLAUSE ( D ) TO THE PROVISO TO SECTION 43(5) MAKES IT CLEAR THAT WITH EFFECT FROM 1-4-2006, ONLY THOSE ELIGIBLE TRANSACTION IN DERIVATIVES REFERRED TO UND ER SECTION 2( AC ) OF THE 1956 ACT, WHICH ARE CARRIED OUT IN A RECOG NIZED STOCK EXCHANGE, SHALL NOT BE DEEMED TO BE A SPECULA TIVE TRANSACTION. IT IS ONLY BECAUSE THE TRANSACTIONS IN DERIVATIVES REFERRED TO UNDER SECTION 2( AC ) OF THE 1956 ACT CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE WERE COVERED UNDER SECTIO N 43(5), THE LEGISLATURE COULD EXCLUDE THOSE TRANSACTIONS FR OM THE ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 7 PURVIEW OF SECTION 43(5) WITH EFFECT FROM 1-4-2006. IN OTHER WORDS, UNLESS THE TRANSACTIONS REFERRED IN CLAUSE ( D ) WERE NOT COVERED UNDER SECTION 43(5), THERE WOULD BE NO QUES TION OF EXCLUDING THOSE TRANSACTIONS FROM THE PURVIEW OF SE CTION 43(5). [PARA 23] 9. EXPLANATION TO SECTION 43(5) WAS ALSO INSERTED B Y FINANCE ACT, 2005 W.E.F. 1.4.2006. THE CONDITIONS THAT A STOCK E XCHANGE IS REQUIRED TO FULFILL FOR BEING NOTIFIED AS RECOGNIZED STOCK EXCH ANGE FOR THE PURPOSES OF CLAUSE (D) TO SECTION 43(5) WERE INSERTED BY INCOME -TAX 20 TH AMENDMENT RULES 2005 W.E.F. 1.7.2005. THESE CONDITIONS AS PER RULE 6DDA OF I.T. RULES, 1962 AT THE RELEVANT TIME WERE AS UNDER :- 6DDA. CONDITIONS THAT A STOCK EXCHANGE IS REQUIRED TO F ULFIL TO BE NOTIFIED AS A RECOGNISED STOCK EXCHANGE FOR THE PURPOSES OF CLAUSE (D) OF PROVISO TO CLAUSE (5) OF SECTION 43.FOR THE PURPOSES OF CLAUSE (D) OF PROVISO TO CLAUSE (5) OF SECTI ON 43, A STOCK EXCHANGE SHALL FULFIL THE FOLLOWING CONDITIONS IN RESPECT OF TRADING IN DERIVATIV ES, NAMELY : (I) THE STOCK EXCHANGE SHALL HAVE THE APPROVAL OF THE SE CURITIES AND EXCHANGE BOARD OF INDIA ESTABLISHED UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) IN RESPECT OF TRADING IN DERIVATIVES AND SHALL FUNCTION IN ACCORDANCE WITH THE GUIDELINES OR CONDITIONS LAID DOWN BY THE SECURITIES AND EXCHANGE BOA RD OF INDIA ; (II) THE STOCK EXCHANGE SHALL ENSURE THAT THE PARTICULA RS OF THE CLIENT (INCLUDING UNIQUE CLIENT IDENTITY NUMBER AND PAN) ARE DULY RECORDED AND STORE D IN ITS DATABASES ; (III) THE STOCK EXCHANGE SHALL MAINTAIN A COMPLETE AUDI T TRIAL OF ALL TRANSACTIONS (IN RESPECT OF CASH AND DERIVATIVE MARKET) FOR A PERIOD OF SEVEN YEARS ON ITS SYSTEM ; (IV) THE STOCK EXCHANGE SHALL ENSURE THAT TRANSACTIONS ONCE REGISTERED IN THE SYSTEM CANNOT BE ERASED OR MODIFIED. *I.T. (20TH AMEND.) RULES, 2005, WEF. 1-7-2005. RULE 6DDB PROVIDES THE PROCEDURE FOR NOTIFICATION A S REQUIRED UNDER EXPLANATION (II) TO SECTION 43(5). THIS PROCEDURE I S LAID DOWN AS UNDER :- *6DDB. NOTIFICATION OF A RECOGNISED STOCK EXCHANGE FOR T HE PURPOSES OF CLAUSE (D) OF PROVISO TO CLAUSE (5) OF SECTION 43.(1) AN APPLICATION FOR NO TIFICATION OF A STOCK EXCHANGE AS A RECOGNISED STOCK EXCHANGE FOR THE PURPOSES OF CLAUSE (D) O F PROVISO TO CLAUSE (5) OF SECTION 43 MAY BE MADE TO THE MEMBER (L), CENTRAL BOARD OF D IRECT TAXES, NORTH BLOCK, NEW DELHI- 110 001. ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 8 (2) THE APPLICATION REFERRED TO IN SUB-RULE (1) SHAL L BE ACCOMPANIED WITH THE FOLLOWING DOCUMENTS, NAMELY : (I) APPROVAL GRANTED BY SECURITIES AND EXCHANGE BOARD OF INDIA FOR TRADING IN DERIVATIVES ; (II) UP-TO-DATE RULES, BYE-LAWS AND TRADING REGULATION S OF THE STOCK EXCHANGE ; (III) CONFIRMATION REGARDING FULFILLING THE CONDITI ONS REFERRED TO IN CLAUSE (II) TO CLAUSE (IV) OF RULE 6DDA ; (IV) SUCH OTHER INFORMATION AS THE STOCK EXCHANGE MAY LIKE TO PLACE BEFORE THE CENTRAL GOVERNMENT. (3) THE CENTRAL GOVERNMENT MAY CALL FOR SUCH OTHER INFOR MATION FROM THE APPLICANT AS IT DEEMS NECESSARY FOR TAKING A DECISION ON THE APPLICATI ON. (4) THE CENTRAL GOVERNMENT, AFTER EXAMINING THE INFOR MATION FURNISHED BY THE STOCK EXCHANGE UNDER SUB-RULE (2) OR SUB-RULE (3), SHALL NOTIFY THE STOCK EXCHANGE AS A RECOGNISED STOCK EXCHANGE FOR THE PURPOSES OF CLAUSE (D) OF PROVISO TO CL AUSE (5) OF SECTION 43 OR ISSUE AN ORDER REJECTING THE APPLICATION BEFORE THE EXPIRY OF FO UR MONTHS FROM THE END OF THE MONTH IN WHICH THE APPLICATION IS RECEIVED. (5) THE NOTIFICATION REFERRED TO IN SUB-RULE (4) SHAL L BE EFFECTIVE UNTIL THE APPROVAL GRANTED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA IS WITHDRAWN OR EXPIRED, OR THE NOTIFICATION IS RESCINDED BY THE CENTRAL GOVERNMENT. *I.T. (20TH AMEND.) RULES, 2005, W.E.F.1-7-2005. A COMBINED READING OF THE PROVISION OF CLAUSE (D) T O PROVISO TO SECTION 43(5) AND THE EXPLANATION (II) TO SECTION 43(5) AND ABOVE RULES 6DDA AND 6DDB INDICATE THAT A STOCK EXCHANGE WHETHER NEWLY C REATED OR ALREADY EXISTING SHOULD SATISFY ABOVE CONDITIONS AS PER RUL E 6DDA AND SUCH STOCK EXCHANGE SHOULD BE APPROVED BY THE STOCK EXCH ANGE BOARD OF INDIA (SEBI) UNDER THE SEBI ACT, 1992 FOR RECOGNITI ON OF A STOCK EXCHANGE SHOULD KEEP RECORD OF PARTICULARS OF THE C LIENTS, COMPLETE AUDIT TRIAL OF ALL TRANSACTIONS ARE MAINTAINED FOR SEVEN YEARS AND THAT SUCH TRANSACTIONS ARE NOT ERASED OR MODIFIED. ON AN APPL ICATION FILED WITH CBDT ALONG WITH PARTICULARS AS GIVEN IN RULE 6DDB, THE STOCK EXCHANGE WILL BE NOTIFIED AS RECOGNIZED STOCK EXCHANGE FOR T HE PURPOSE OF CLAUSE (D) TO PROVISO TO SUBSECTION (5) OF SECTION 43. IN OUR CONSIDERED VIEW RULE ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 9 6DDA HAS COME INTO EFFECT FROM 1.7.2005 AND WILL AC CORDINGLY BE EFFECTIVE FROM DATE ONLY. IN OTHER WORDS, A STOCK E XCHANGE CAN FILE AN APPLICATION WITH CBDT FOR RECOGNITION WITHIN THE ME ANING OF CLAUSE (D) OF PROVISO TO SECTION 43(5) AFTER THIS DATE. THE MA IN PROVISION I.E. CLAUSE (D) OF PROVISO TO SECTION 43(5) HAS COME INTO EFFEC T FROM 1.4.2006. IT MEANS THAT THE GOVERNMENT HAS PRESCRIBED THE CONDIT IONS AND MADE EFFECTIVE IN ADVANCE SO THAT STOCK EXCHANGES CAN TA KE STEPS TO FILE APPLICATION FOR RECOGNITION FOR DERIVATIVE TRANSACT IONS MUCH IN ADVANCE. HOWEVER, RULE 6DDB IS ONLY A PROCEDURAL LAW AS IT P RESCRIBES THE METHOD HOW TO APPLY FOR NECESSARY RECOGNITION AND C ONSEQUENT NOTIFICATION. THE ISSUE IS WHETHER NOTIFICATION ISS UED ON 25.1.2006 CAN CURTAIL THE APPLICABILITY OF CLAUSE (D) OF PROVISO TO SECTION 43(5) SO AS TO MAKE TRANSACTIONS IN DERIVATIVES DONE PRIOR TO 25.1 .2006 AS SPECULATIVE AND TRANSACTIONS AFTER 25.1.2006 AS NON-SPECULATIVE AS ARGUED BY THE REVENUE. 10. WE DO NOT, HOWEVER, AGREE WITH THE VIEW ADVANCE D BY THE REVENUE THAT NOTIFICATION DATED 25.1.2006 IS PROSPECTIVE IN EFFECT. IT IS UNDISPUTED THAT RULE 6DDB IS ONLY PROCEDURAL IN NATURE. WHEN A RULE OR PROVISION DOES NOT AFFECT OR EMPOWER ANY RIGHT OR CREATE AN O BLIGATION OR ONLY RELATES TO PROCEDURES, THEN IT IS DEEMED TO BE RETR OSPECTIVE UNLESS SUCH INFERENCE IS LIKELY TO LEAD ABSURDITY. THUS IF AN A MENDMENT IS MADE IN PROCEDURE IT WILL APPLY TO ALL PROCEEDINGS PENDING OR TO BE INITIATED. IN THE ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 10 CONTEXT OF RULE 1BB HON. RAJASTHAN HIGH COURT IN CW T VS. MAN BAHADUR SINGH (1994) 208 ITR 658 HELD THAT SUCH PRO CEDURAL AMENDMENT IN RULE WOULD BE RETROSPECTIVE. THEREFORE, IN OUR C ONSIDERED VIEW IF TRANSACTIONS ARE CARRIED OUT THROUGH STOCK EXCHANGE S FROM 1.4.2005 TO 25.1.2006 WHICH ARE RECOGNIZED BY NOTIFICATION ISSU ED BY CBDT ON 25.1.2006 WOULD BE ELIGIBLE FOR BEING TREATED AS NO N-SPECULATIVE WITHIN THE MEANING OF CLAUSE (D) OF PROVISO TO SECTION 43( 5). THE NOTIFICATION ISSUED UNDER RULE 6DDB DOES NOT EMPOWER ANY RIGHT O R CREATE OBLIGATION BUT ONLY RECOGNIZES WHAT IS ALREADY IN EXISTENCE. I T IS NOT A CASE THAT NSE OR BSE WERE CREATED AFTER 25.1.2006 AND, THEREFORE, TRANSACTIONS COULD NOT HAVE BEEN CARRIED OUT THROUGH THEM AND, THEREFORE, TRANSACTIONS CARRIED OUT PRIOR TO THIS DATE WOULD NOT BE COVERED FOR BEI NG TREATED AS NON- SPECULATIVE. IN OTHER WORDS IF TRANSACTIONS ARE DER IVATIVES AND ARE CARRIED OUT THROUGH STOCK EXCHANGE WHICH ARE ALREADY IN EXI STENCE DURING ASST. YEAR 2006-07 I.E. FY 1.4.05 & 31-3-06 ONWARDS AND W HICH ARE SUBSEQUENTLY RECOGNIZED UNDER RULE 6DDB AND THERE I S NO ALLEGATION THAT SUCH TRANSACTIONS OR THE STOCK EXCHANGES HAVE VIOLA TED ANY CONDITION PRESCRIBED UNDER RULE 6DDB THEN SUCH RECOGNITION TO STOCK EXCHANGES BY CBDT FOR THE PURPOSE OF CLAUSE (D) OF PROVISO TO SE CTION 43(5) WOULD BE RETROSPECTIVE EFFECT FROM 1.4.2006. 11. OUR VIEW THAT NOTIFICATION DATED 25.1.2006 WOUL D BE EFFECTIVE FROM 1.4.2005 I.E. IT WOULD BE APPLICABLE TO ENTIRE ASST . YEAR 2006-07 IS ALSO ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 11 SUPPORTED BY A RECENT DECISION OF ITAT, MUMBAI IN A CIT VS. PARIMAL D. NATHWANI (2011) 9 TAXMANN.COM 284 (MUM-ITAT) PRONOU NCED ON JANUARY 21,2011 WHEREIN FOLLOWING DECISION OF THE I TAT DELHI BENCH IN THE CASE OF G.K. ANAND BROS.BUILDWELL (P) LTD. VS. ITO (2009) 34 SOT 439 (DELHI) HELD THAT NOTIFICATION DATED 24.1.2006 IS ONLY A SUBORDINATE LEGISLATION AND CANNOT OVER RIDE THE PRINCIPAL LEGI SLATION ENACTED BY THE PARLIAMENT. ITAT MUMBAI BENCH IN THAT CASE HELD AS UNDER:- 11. IT IS THE CONTENTION OF THE REVENUE THAT THE NO TIFICATION WAS ISSUED ON 24.01.2006 AND ACCORDINGLY THE TRANSACTIO NS EFFECTED PRIOR TO 24.1.2006 ARE TO BE CONSIDERED AS SPECULATIVE TRANS ACTIONS AND THE 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. V. ITO 234 SOT 439 (DELHI) HAS CONSIDERED THE ISSUE AND H ELD THAT NOTIFICATION DATED 24.1.2006 IS BY WAY OF A SUBORDI NATED LEGISLATION BUT CANNOT OVERRIDE THE PRINCIPAL LEGISLATION ENACT ED BY THE PARLIAMENT. THEREFORE THE LOSS IN QUESTION WAS TO B E 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 RESULTE D INTO A LOSS OF RS. 20,36,328, THE AO WAS OF THE OPINION THAT LOSS IN FUTURE AND OPTION SEGMENT IS TO BE CONSIDERED AS SPECULATION L OSS IN TERMS OF SECTION 43 ( 5 ) R/ W EXPLANATION TO SECTION 73. THE ASSESSEE SUBMITTED THAT THE TRANSACTIONS ARE CARRIED ON THRO UGH A BROKER M/S MARCH SECURITIES ( P. ) LTD. WHO IS A REGISTERED MEMBER OF NATIONAL STOCK EXCHANGE. THE SPECULATIVE TRANSACTIO N IS DEFINED IN SECTION 43 ( 5 ) . CLAUSE ( D ) OF THE PROVISO TO SECTION 43 ( 5 ) PROVIDES, 'AN ELIGIBLE TRANSACTION IN RESPECT OF TR ADING IN DERIVATIVES REFERRED TO IN SECURITIES CONTRACTS ( REGULATION ) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE, SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION'. THE PHRASE S 'ELIGIBLE TRANSACTION' AS ALSO 'RECOGNIZED STOCK EXCHANGE' IS DEFINED IN EXPLANATION BELOW THE PROVISO TO SECTION 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 LOS S IN SUCH TRANSACTION CANNOT BE CLASSIFIED AS LOSS IN SPECULA TION BUSINESS. ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 12 THE AO HELD, THAT THE TRANSACTIONS ARE CARRIED ON A T NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE. BOMBAY ST OCK EXCHANGE LTD. AND NATIONAL STOCK EXCHANGE OF INDIA LTD. ARE RECOGNIZED STOCK EXCHANGES AS PER NOTIFICATION DT. 25TH JAN., 2006. THEREFORE THE TRANSACTIONS IN F&O SEGMENT PRI OR TO 25TH JAN., 2006 ARE REGARDED AS SPECULATIVE LOSS. SECTION 43 ( 5 ) DEFINED ' SPECULATIVE TRANSACTION ' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES IS PERIODICAL OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TH E TRANSFER OF COMMODITY OR SCRIPS. PROVISO BELOW SECTION 43 ( 5 ) CARVES OUT EXCEPTIONS TO SECTION 43 ( 5 ) . AS PER CL. ( D ) OF THE SAID PROVISO 'AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIV ATIVES REFERRED IN SECURITIES CONTRACTS ( REGULATION ) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION'. CLAUSE ( D ) IN THE PROVISO WAS INSERTED BY FINANCE ACT, 2005 W.E.F. 1ST APRIL, 2006. THEREF ORE, IF A TRANSACTION FALLS WITHIN CL. ( D ) OF THE PROVISO WILL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION IN RESPECT OF TRANS ACTION 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 EXPLANATION AND IT IS CARRIED ON AT RECOGNIZED STOCK EXCHANGE A S EXPLAINED IN CL. ( II ) OF THE SAID EXPLANATION BELOW PROVISO TO SECTION 4 3 ( 5 )( D ) . THE RECOGNIZED STOCK EXCHANGE MEANS A RECOGNIZED ST OCK EXCHANGE AS NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE. THEREFORE, EVEN IF THE NOTIFICATION IS FROM A PARTI CULAR DATE, AS PER CL. ( D ) INSERTED, THE SAME WILL APPLY TO ALL THE TRANSACTI ONS IN RELATION TO ASST. YR. 2006-07 AND ONWARDS. CLAUSE ( D ) DOES NOT MENTION THAT UNLESS THE RECOGNIZED STOCK EXCHANGE I S 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 STO CK EXCHANGE IS NOTIFIED, THE SAME WILL APPLY IN RESPECT OF ALL ELIGIBLE TRANSACTIONS CARRIED OUT IN RELATION TO FINANCIAL Y EAR RELEVANT TO ASST. YR. 2006-07 AND ONWARDS. THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICES LTD. ( SUPRA ) IN PARA 7 HELD THAT 'CL. ( D ) OF SECTION 43 ( 5 ) IS PROSPECTIVE 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 S UBORDINATED LEGISLATION BUT CANNOT OVERRIDE THE PRINCIPAL LEGIS LATION ENACTED BY THE PARLIAMENT. IT ONLY CLARIFIES BUT WILL NOT O VERRIDE UNLESS STATUTORILY SO PRESCRIBED. SINCE THERE IS NO DISPUT E TO THE FACT THAT THE TRANSACTIONS IN THE PRESENT CASE IN F&O SEGMENT ARE THE ELIGIBLE TRANSACTIONS CARRIED OUT IN A RECOGNIZED S TOCK EXCHANGE, LOSS IN SUCH TRANSACTIONS CANNOT BE DEEMED TO BE TR ANSACTION IN ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 13 SPECULATION BUSINESS. THE SAME BEING CONSIDERED AS REGULAR BUSINESS TRANSACTION, LOSS INCURRED IN THE SAME IS TO BE TREATED AS BUSINESS LOSS AND NOT LOSS IN SPECULATION BUSINESS. ' 12. IN VIEW OF THIS, RESPECTFULLY FOLLOWING THE SAM E WE ARE OF THE OPINION THAT THERE IS NO MERIT IN GROUND NO. 2 RAIS ED BY THE REVENUE. ACCORDINGLY GROUND NO. 2 IS REJECTED AND A.O. IS DI RECTED TO TREAT THE PROFIT/LOSS ON DERIVATIVES AS NON-SPECULATIVE BUSIN ESS PROFITS AS PER THE PROVISIONS OF THE ACT EFFECTIVE FROM 1.4.2006. 12. IN VIEW OF ABOVE, WE DO NOT FIND ANY REASONS TO TAKE A DIFFERENT VIEW THAN WHAT IS TAKEN BY LD. CIT(A). AS A RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 17.06.2011. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 17/06/2011. FIT FOR PUBLICATION. MAHATA/- (JM) (AM) COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD ITA NO.3361/AHD/2009 ASST. YEAR 2006-07 14 1.DATE OF DICTATION 2/6/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 7/6/2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..