ITO 12(1)-4, MUMBAI V. SALOME A SHAH, MUMBAI

ITA 3771/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1313 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 01-06-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 11-06-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P PEERYA
• Assessee Lawyers: SANJAY R PARIKH
• Keywords: Transactions in derivatives; Tax effect; Speculative transactions
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL S.M.C. BENCH , MUMBAI. BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 3771/MUM/2009. ASSESSMENT YEAR : 2005-06. THE INCOME TAX OFFICER, M/S SALOME A. SHAH, 12(1)-4, MUMBAI. VS. 68, ALI CHAMBERS, PAN AAEPS3151L 7 0/80, TAMARIND LANE, MUMBI 400 023. APPELLANT RESPONDENT APPELLANT BY : SHRI P. PEERYA. RESPONDENT BY : S HRI SANJAY R. PARIKH. O R D E R THE REVENUE HAS FILED THIS APPEAL AGAINST THE ORDE R OF THE CIT(APPEALS)-XII, MUMBAI DATED 23-03-2009, FOR ASSE SSMENT YEAR 2005- 06 ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN TREATING THE DERIVATIVE LOSS OF RS.11,66,6 36/- ON ACCOUNT OF HEDGING TRANSACTIONS AS BUSINESS LOSS AND ALLOWED T HE SAME TO THE ASSESSEE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE NATURE OF ELIG IBLE TRANSACTIONS WITHIN THE MEANING OF SECTION 43(5)(D) INTERPRETED IN THE BACKDROP OF NOTIFICATION NO. SO 89(E) DT. 25/1/2006. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) ERRED IN CONSIDERING THE TRANSACTION AS ELIG IBLE TRANSACTION THOUGH THE NSE AND BSE WERE RECOGNIZED ONLY W.E.F. 25/1/2006 VIDE SO 89 (E) DT. 25/1/2006 2. AFTER HEARING RIVAL CONTENTIONS, I FIND THAT T HE SOLE ISSUE THAT IS BEFORE THE TRIBUNAL IS WHETHER THE TRADING IN D ERIVATIVES IS A 2 SPECULATION TRANSACTION AND WHETHER THE AMENDMENT M ADE TO SECTION 43(5)(D) IS RETROSPECTIVE IN NATURE OR NOT. 3. THE FIRST APPELLATE AUTHORITY RELIED ON THE DEC ISION OF THE HONBLE TRIBUNAL IN THE CASE OF RBK SECURITIES PVT. LTD. VS. ITO 113 TTJ (MUM) 465. AS POINTED OUT BY THE LEARNED DR, THE IS SUE NOW STANDS COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S SHREE CAPITAL SERVICES 121 ITD 498 (CAL) ( SB) WHEREIN IT IS HELD AS FOLLOWS : IN THE INSTANT CASE, TWO QUESTIONS EMERGED FOR AD JUDICATION, VIZ. (I) WHETHER THE TRANSACTION IN DERIVATIVES FEL T WITHIN THE MEANING OF SPECULATIVE TRANSACTION AS PROVIDED UNDE R SECTION 43(5), AND (II) IF THE ANSWER TO THE ABOVE QUESTION WAS IN THE AFFIRMATIVE, I.E., THE TRANSACTION IN DERIVATIVES WAS HELD TO BE SPECULATIVE TRANSACTION UNDER SECTION 43(5), WHETHER CLAUSE (D) OF SECTION 43(5) INTRODUCED BY THE FINANCE ACT, 2005 WITH EFFECT FRO M 1-4-2006 WAS CLARIFICATORY IN NATURE AND, THEREFORE, RETROSPECT IVE IN OPERATION. FROM A READING OF THE PROVISIONS OF SECTION 43(5), IT IS CLEAR THAT SPECULATIVE TRANSACTION IS A TRANSACTION IN WHICH C ONTRACT FOR PURCHASE AND SALE OF ANY COMMODITY IS SETTLED OTHER WISE THAN BY ACTUAL DELIVERY. IT IS NOT IN DISPUTE THAT IN THE C ASE OF TRANSACTION IN DERIVATIVES, THE TRANSACTION IS ALWAYS SETTLED OTHE RWISE THAN BY ACTUAL DELIVERY. HOWEVER, IT WAS CONTENDED BY THE A SSESSEE THAT SECTION 43(5) WAS APPLICABLE ONLY IN RESPECT OF CON TRACT FOR PURCHASE AND SALE OF COMMODITY. ITS CONTENTION WAS THAT THE DERIVATIVE WAS NOT A COMMODITY AND, THEREFORE, SECT ION 43(5) WOULD NOT BE APPLICABLE AT ALL. FROM A READING OF T HE TERM DERIVATIVE BEING EXPLAINED BY THE SEBI IN ITS WEB SIDE, IT IS CLEAR THAT THE DERIVATIVES DERIVE ITS VALUE FROM THE UNDE RLYING ASSET. THE UNDERLYING ASSET CAN BE SECURITIES, COMMODITIES, BU LLION, CURRENCY, ETC. IN THE INSTANT APPEAL, IT WAS FAIRLY ADMITTED BY TH E ASSESSEE THAT THE UNDERLYING ASSETS IN THE DERIVATIVES DEALT WITH BY IT WERE SHARES OF CERTAIN COMPANIES. THE SUPREME COURT IN THE CASE OF CIT V. B. SURESH [2009] 313 ITR 149/178 TAXMAN 457, HELD THAT DUE TO TECHNOLOGICAL ADVANCEMENT, ONE HAS TO CHANGE ONES THINKING ABOUT 3 VARIOUS CONCEPTS LIKE GOODS, MERCHANDISE AND ARTICL ES. THE ABOVE OBSERVATION WOULD BE SQUARELY APPLICABLE WHILE INTE RPRETING THE WORD COMMODITY. IN SECTION 43(5), THE TERM COMMO DITY HAS BEEN GIVEN A WIDE MEANING BECAUSE IT IS MENTIONED T HAT ANY COMMODITY INCLUDES STOCKS AND SHARES. THEREFORE, EV EN IF IN COMMON PARLANCE THE TERM COMMODITY MAY NOT INCLUD E ANY STOCKS AND SHARES, BUT THE LEGISLATURE FOR THE PURP OSE OF SECTION 43(5) PROVIDED THAT THE TERM COMMODITY MAY NOT INC LUDE ANY STOCKS AND SHARES, BUT THE LEGISLATURE FOR THE PURP OSE OF SECTION 43(5) PROVIDED THAT THE TERM COMMODITY WOULD INCL UDE STOCKS AND SHARES. THIS MAKES THE INTENTION OF THE LEGISLA TURE CLEAR THAT IT HAS USED THE TERM COMMODITY IN A VERY WIDE MANNER . SECTION 43(5) WAS BROUGHT ON THE STATUTE DECADES BACK WHEN THERE WAS NO CONCEPT OF TRADING IN DERIVATIVES. THEREFORE, NATUR ALLY THE LEGISLATURE WILL NOT MENTION THE WORD DERIVATIVES IN SECTION 43(5). HOWEVER, IT HAS BEEN PROVIDED THAT THE TERM COMMODITY WOULD INCLUDE STOCKS AND SHARES. THUS, THE SECURITI ES REPRESENTED BY STOCKS AND SHARES ARE INCLUDED IN THE TERM COMM ODITY. THE DERIVATIVES ARE ALSO SECURITIES. DERIVATIVE DERIVE S ITS VALUE FROM THE UNDERLYING ASSETS. IN OTHER WORDS THE UNDERLYIN G ASSETS ARE REPRESENTED BY DERIVATIVES. WHEN THE UNDERLYING ASS ET OF ANY DERIVATIVE IS SHARE AND STOCK FOR ALL PRACTICAL PUR POSES, THE TREATMENT GIVEN TO SUCH DERIVATIVES SHOULD BE SIMIL AR TO STOCKS AND SECURITIES. IN THE INSTANT APPEAL, IT WAS ADMITTED THAT THE UNDERLYING ASSETS WERE SHARES. THEREFORE, DERIVATIVES WOULD AL SO FALL WITHIN THE MEANING OF COMMODITY USED IN SECTION 43(5). FURTH ER, THE FINANCE ACT, 2005 HAS PROVIDED THAT CERTAIN TRANSAC TIONS IN RESPECT OF TRADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF SECTION 43(5). I F THE TRANSACTION IN DERIVATIVES DOES NOT FALL WITHIN THE DEFINITION OF SPECULATIVE TRANSACTION UNDER SECTION 43(5), THEN THERE IS NO QUESTION OF EXEMPTING CERTAIN TYPES OF TRANSACTIONS IN DERIVATI VES FROM THE SCOPE OF SPECULATIVE TRANSACTION UNDER SECTION 43(5 ).IF IT IS TO BE HELD THAT THE TRANSACTION IN DERIVATIVES DOES NOT F ALL IN SECTION 43(5), IT WILL MAKE CLAUSE (D) AND THE EXPLANATION THERETO BELOW SECTION 43(5) INTRODUCED BY THE FINANCE ACT, 2005 T O BE REDUNDANT. IN FURTHERANCE TO THE ABOVE EXPLANATION, THE CENTRA L GOVERNMENT HAS ALSO FRAMED RULES 6DDA AND 6DDB. IT CANNOT BE P RESUMED THAT THE GOVERNMENT HAS INTRODUCED CLAUSE (D) AS WELL AS THE EXPLANATION THERETO, WHICH WAS REDUNDANT AND INFRUC TUOUS. 4 IN VIEW OF THE ABOVE, IT WAS TO BE HELD THAT THE TE RM DERIVATIVES IN WHICH UNDERLYING ASSET IS SHARE, WILL FALL WITHIN T HE MEANING OF COMMODITY USED IN SECTION 43(5). NOW THE QUESTION FOR CONSIDERATION ARISES AS TO WHE THER CLAUSE (D) OF PROVISO TO SECTION 43(5) INTRODUCED BY THE FINAN CE ACT, 2005 WITH EFFECT FROM 1-4-2006 IS CLARIFICATORY AND, THE REFORE, RETROSPECTIVE IN NATURE. IN THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2005, WHICH INTRODUCED CLAUSE (D), THE PURPOSE OF I NTRODUCTION OF CLAUSE (D) HAS BEEN EXPLAINED. FROM A READING OF TH E SAID MEMORANDUM, IT IS EVIDENT THAT THE TRANSACTION IN D ERIVATIVES IS EXEMPTED FROM THE PURVIEW OF SPECULATIVE TRANSACTIO N UNDER SECTION 43(5) BECAUSE OF RECENT SYSTEMIC AND TECHNO LOGICAL CHANGES INTRODUCED BY THE STOCK EXCHANGE. THE ABOVE INTENTI ON OF THE LEGISLATURE IS ALSO CLEAR FROM THE FACT THAT ALL TH E TRANSACTIONS IN DERIVATIVES HAVE NOT BEEN EXEMPTED FROM THE AMBIT O F SPECULATIVE TRANSACTION UNDER SECTION 43(5) BUT ONLY THE ELIGIB LE TRANSACTIONS OF TRADING IN DERIVATIVES CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE ARE EXEMPT. BY WAY OF THE EXPLANATION, THE LEGISLAT URE HAS ALSO DEFINED THE TERM ELIGIBLE TRANSACTION AND RECOGN IZED STOCK EXCHANGE. THE LEGISLATURE HAS ALSO PROVIDED RULE 6 DDA AND 6DDB PRESCRIBING THE CONDITIONS WHICH A STOCK EXCHA NGE IS REQUIRED TO FULFIL TO GET NOTIFIED AS A RECOGNIZED STOCK EXCHANGE FOR THE PURPOSE OF CLAUSE (D) OF PROVISO TO SECTION 43( 5). THIS RULE IS INSERTED WITH EFFECT FROM 1-7-2005. FROM THE ABOVE IT IS ABUNDANTLY CLEAR THAT CLAUSE (D) OF PROVISO TO SECTION 43(5) C ANNOT BE SAID TO BE CLARIFICATORY IN NATURE. IN VIEW OF THE AFORESAID, IT IS CLEAR THAT CLAUSE ( D) OF PROVISO TO SECTION 43(5) IS PROSPECTIVE IN NATURE AND WILL BE EFFECTIVE FROM THE DATE ON WHICH THE LEGISLATURE MADE IT EFFECTIVE, I. E. 1-4-2006 AND WILL BE APPLICABLE TO THE ASSESSMENT YEAR 2006-07 O NWORDS. IN THE RESULT THE ASSESSEES APPEAL WAS LIABLE TO B E DISMISSED. 4. THE REVENUE ALSO FILED AN ADDITIONAL GROUND WHE REIN IT IS URGED THAT, THOUGH THE TAX EFFECT INVOLVED IN THIS CASE IS BELOW THE STATUTORY LIMIT FOR FILING OF APPEAL BEFORE THE TRI BUNAL, AS A LEGAL ISSUE IS 5 INVOLVED AND AS THE ISSUE IS COVERED IN ITS FAVOUR BY THE DECISION OF THE SPECIAL BENCH, THE CASE MAY BE DECIDED ON MERIT. 5. AFTER CONSIDERING THIS ADDITIONAL GROUND, I ADM IT THE SAME AND DISPOSE OF THE ISSUE ON MERITS. 6. AS ADMITTEDLY THE ISSUE IS COVERED AGAINST THE ASSESSEE ON MERIT, I ALLOW THE APPEAL OF THE REVENUE. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED. ORDER PRONOUNCED ON THIS 25 TH DAY OF JUNE, 2010. SD/- (J. SUDHAKAR REDDY) MUMBAI, ACCOUNTANT MEMBER. DATED : 25 TH JUNE, 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, B-BENCH (TRUE COPY) BY ORDER AS STT.REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI.