RAMESH KUMAR GOPALDAS, MUMBAI V. ACIT CIR 13(3), MUMBAI

ITA 4716/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7656 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 02-03-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 16-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T T JACOB
• Assessee Lawyers: S B PUNJABI
• Keywords: Business income; Speculation loss; Futures and options; Speculative transactions
• Section: 43(5); 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 4716/MUM/2008 (ASSESSMENT YEAR: 2005-06) M/S. RAMESH KUMAR GOPALDAS ACIT, CIRCLE 13(3) 205-207, YOGESHWAR BLDG. MUMBAI 135-137 KAZI SYED STREET VS. MUMBAI 400003 PAN - AAEFR 0535 P APPELLANT RESPONDENT APPELLANT BY: SHRI S.B. PUNJABI RESPONDENT BY: SHRI T.T. JACOB O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XIII, MUMBAI DATED 07.05.2008. 2. ASSESSEE HAS RAISED DETAILED GROUNDS WHICH ALSO HAS SUBMISSIONS AS UNDER: - THE LEARNED COMMISSIONER OF INCOME TAX (A) ERRED I N SUSTAINING THE LOSS ON FUTURE & OPTIONS RS.15,64,074.88 AS SPECULATIVE TRANSACTIONS THEREBY CONCURRING WITH THE ASSESSING OFFICER THAT THE AMENDMENT TREATING THE DERIVATIVE TRANSACTION AS BUSINESS LOS S HAS COME W.E.F. A.Y. 2006-07 IN VIEW OF THE INSERTION OF CLAUSE (D) TO S ECTION 43(5) AND THAT THE AMENDMENT IS PROSPECTIVE AND NOT RETROSPECTIVE. THE LEARNED COMMISSIONER OF INCOME TAX (A) ALSO ERR ED IN NOT APPRECIATING THAT THE DERIVATIVE TRANSACTIONS ARE N OT DELIVERY BASED AND HAS TO BE SQUARED OFF WITHIN THE SETTLEMENT PERIOD. THERE IS NO UNDERLYING ASSET IN A DERIVATIVE TRANSACTION AND TH E SAME IS ULTIMATELY SQUARED OFF. THE APPELLANT THEREFORE SUBMITS THAT THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE UNDERLYING CONTRACT RELATES TO SHA RES AND THEREFORE AUT0MATICALLY COVERED U/S 43(5) AND CONCURRED BY TH E LEARNED CIT(A) IS NOT CORRECT FOR THE SIMPLE REASON THAT EVEN AS PER THE DEFINITION OF SPECULATIVE TRANSACTION, WHICH COVERS IS STOCK OR S HARES AND NOT DERIVATIVES, WHICH IS NEITHER STOCK NOR SHARES. THU S, EVEN THOUGH THE AMENDMENT HAS COVERED BY INSERTING CLAUSE (D) BY TH E FINANCE ACT 2005, IT IS ONLY CLARIFICATORY IN NATURE MERELY TO CLARIF Y THE POSITION THAT DERIVATIVE TRANSACTION COULD NOT BE HELD AS SPECULA TIVE TRANSACTION AND ITA NO. 4716/MUM/2008 M/S. RAMESH KUMAR GOPALDAS 2 THIS IS FOR THE REASON THAT THERE IS NO DELIVERY TH AT COULD BE TAKEN IN A DERIVATIVE TRANSACTION. THE DECISION ON HON. I.T.A. T. IN THE CASE OF D.C.I.T. VS S.S.KI INVESTORS SERVICES PVT. LTD., BE NCH J, I.T.A. NO. 3182/MUM/04 ORDER DATED 25.09.2007 WHEREIN THE MATT ER RELATED TO A.Y. 2001-02 SUPPORTS THE CONTENTION OF THE APPELLA NT. THE APPELLANT THEREFORE SUBMITS THAT THE LOSS INCUR RED IS BUSINESS LOSS AND DOES NOT HAVE ANY CHARACTER OF SPECULATION AND HENCE THE SAME MAY BE ALLOWED. 3. THE ASSESSEE INCURRED DERIVATIVE LOSS OF RS.17,84,3 88/- AND CLAIMED IT AS BUSINESS LOSS. THE A.O. FOUND OUT THAT THE LOSS WAS INCURRED ON COMMODITY FUTURE TRADING TRANSACTIONS THROUGH M/S. SAMARTH MERCANTILE P. LTD. AND THROUGH KOTAK SECURITIES LTD. THE SUMMARY OF THE LOSS IS AS BELOW: - (A) (I) PROFIT ON COMMODITY FUTURE TRANSACTION RS. 2,80,483/- (II) LOSS ON COMMODITY FUTURE TRANSACTION RS. 5,00 ,797/- (B) (I) LOSS ON FUTURE & OPTIONS RS.15,74,075/- RS.17,84,388/- 4. THE ASSESSEE CLAIMED THE ABOVE LOSS AS BUSINESS LOS S AND SET OFF THE SAME AGAINST BUSINESS INCOME. THE A.O. DID NOT ALLO W THE SAME. BEFORE THE CIT(A) THE ASSESSEE MADE DETAILED SUBMISSION AND TH E CIT(A) UPHELD THE ORDER OF THE A.O. BY CONSIDERING AS UNDER: - 2.4 I HAVE CONSIDERED THE CONTENTION OF THE APPELL ANT. AS FAR AS LOSS ON COMMODITY FUTURE TRANSACTION AMOUNTING TO RS.2,20,3 14/- IS CONCERNED THE SAME SQUARELY FALLS WITHIN THE DEFINITION OF SE CTION 43(5) OF THE I.T. ACT. THE COMMODITY COULD HAVE BEEN ACTUALLY DELIVER ED. THE CONTRACT WAS SQUARED WITHOUT DELIVERY. HENCE THEY ARE SPECU LATIVE TRANSACTION. THE A/R/ OF THE APPELLANT FAIRLY CONCEDED THIS POIN T AT THE TIME OF HEARING. HENCE THE LOSS ON COMMODITY FUTURE TRANSAC TION IS A SPECULATIVE LOSS. THE A.O.S DECISION ON THIS POINT IS CONFIRME D. 2.5 THE NEXT POINT IS WHETHER LOSS ON FUTURE & OPTI ONS ARE SPECULATIVE TRANSACTION OR NOT. TRADING IN FUTURES AND DERIVAT IVES IS OF A RECENT ORIGIN. NO DOUBT TRADING IN FUTURES/DERIVATIVES IS A BUSINESS. BUT THE QUESTION IS WHETHER THE SAME IS SPECULATIVE OR NOT FOR THE PURPOSE OF I.T. ACT. THE INCOME-TAX ACT DIFFERENTIATES BETWEEN BUSI NESS WHERE THERE IS A ACTUAL DELIVERY OF GOODS AND WHERE THERE IS NO ACTU AL DELIVERY OF GOODS. SPECULATION TRANSACTION IS DEFINED IN SECTION 43( 5) OF THE I.T. ACT. PRIOR TO 1/04/2006, THERE WAS A DILEMMA AS TO WHETHER TRA DING IN DERIVATIVES /FUTURES IS A SPECULATIVE TRANSACTION OR NOT. IT IS BECAUSE OF VERY NATURE OF TRANSACTION. IN THESE TRANSACTIONS, ACTUAL DELIV ERY IS NOT POSSIBLE. THIS ORDER OF THE CIT(A) IN THE CASE OF SSKI INVESTORS S ERVICES PVT. LTD. WHICH WAS LATER CONFIRMED BY THE ITAT REFLECTS THIS DILEM MA. THE DECISION OF THE CIT(A) WAS PRIOR TO 1/04/2006 AND CLAUSE (D) TO SECTION 43(5) WAS NEVER PLACED BEFORE THE ITAT. IN VIEW OF THIS, THIS ORDER IS DISTINGUISHABLE. THE INSERTION OF CLAUSE (D) TO SEC TION 43(5) MAKES CLEAR ITA NO. 4716/MUM/2008 M/S. RAMESH KUMAR GOPALDAS 3 THE INTENTION OF THE LEGISLATION. IT CLARIFIES THAT TRADING IN DERIVATIVES/FUTURES CAN BE TREATED AS NON-SPECULATI VE ONLY IF THE TRADING IS DONE IN SPECIFIED STOCK EXCHANGES AND ONLY IF CE RTAIN CONDITIONS ARE SPECIFIED. IT MEANS THAT TRADING IN FUTURES/DERIVAT IVES ARE SPECULATIVE TRANSACTION AS FAR AS I.T. ACT IS CONCERNED, IF PR OVISION OF CLAUSE (D) TO SECTION 43(5) IS NOT FULFILLED. THIS CLAUSE CAME IN TO EFFECT FROM 1/04/2006 AND ARE APPLICABLE FROM A.Y. 2006-07. THE CBDT NOTI FIED THE SPECIFIED STOCK EXCHANGE ON 25/01/2006. HENCE, IT IS CLEAR TH AT THE PROVISIONS CANNOT BE APPLIED RETROSPECTIVELY. FURTHER, IF THE DERIVATIVES/SECURITIES WERE NOT PART OF SPECULATION TRANSACTION, THERE W AS NO NEED TO INSERT CLAUSE (D) TO SECTION 43(5) OF THE I.T.A ACT. THE I NTENTION OF LEGISLATURE WAS THEREFORE ALWAYS CLEAR. THIS POINT WAS NEVER PU T BEFORE THE ITAT. IN VIEW OF THIS, I CONCUR WITH THE VIEW OF THE AO THAT TRANSACTION IN DERIVATIVES/FUTURES ARE SPECULATIVE TRANSACTION F OR THE YEAR. THE LOSS FROM SUCH TRANSACTION CANNOT BE SET OFF AGAINST BUS INESS INCOME IN VIEW OF SPECIFIC PROVISIONS OF I.T. ACT. THE GROUND FAIL S. 5. AT THE OUTSET IT WAS FAIRLY CONCEDED THAT THIS ISSU E IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE SPECIAL BENCH IN THE CASE OF SHRI CAPITAL SERVICES LTD. 318 ITR (AT) 1 (KOL) (SB) WHE REIN IT WAS 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. THEREFOR E, EVEN IF IN COMMON PARLANCE THE TERM COMMODITY MAY NOT INCLUDE ANY S TOCKS AND SHARES, THE LEGISLATURE FOR THE PURPOSE OF SECTION 43(5) PR OVIDED THAT THE TERM COMMODITY WOULD INCLUDE STOCKS AND SHARES. THIS M AKES THE INTENTION OF THE LEGISLATURE CLEAR THAT THEY USED THE TERM C OMMODITY IN A VERY WIDER MANNER. SECTION 43(5) WAS BROUGHT ON THE STAT URE WHEN THERE WAS NO CONCEPT OF TRADING IN DERIVATIVES,. DERIVATIVES ARE ALSO SECURITIES. DERIVATIVES DERIVE THEIR VALUE FROM THE UNDERLYING ASSETS. IN OTHER WORDS, THE UNDERLYING ASSETS ARE REPRESENTED BY THE DERIVA TIVES. WHEN THE UNDERLYING ASSET OF ANY DERIVATIVE IS SHARES AND ST OCK FOR ALL PRACTICAL PURPOSES, THE TREATMENT GIVEN TO SUCH DERIVATIVES S HOULD BE SIMILAR TO STOCK AND SECURITIES. THEREFORE, DERIVATIVES WILL A LSO FALL WITHIN THE MEANING OF COMMODITY USED IN SECTION 43(5). THE FINANCE ACT, 2005 HAS PROVIDED THAT CERTAIN TRA NSACTIONS IN RESPECT OF TRADING IN DERIVATIVES SHALL NOT BE DEEM ED TO BE SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF SECTION 43(5). I F THE TRANSACTION IN DERIVATIVES DID NOT FALL WITHIN THE DEFINITION OF SPECULATION TRANSACTION UNDER THE SECTION 43(5), THERE WAS NO QUESTION OF E XEMPTING CERTAIN TYPES OF TRANSACTION IN DERIVATIVES FROM THE SCOPE OF SPE CULATIVE 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 UNDERLYING ASSET IS SHAR E, WILL FALL WITHIN THE ITA NO. 4716/MUM/2008 M/S. RAMESH KUMAR GOPALDAS 4 MEANING OF COMMODITY USED IN SECTION 43(5) OF THE ACT. 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. AP RIL 1, 2006 AND WILL BE APPLICABLE TO THE ASSESSMENT YEAR 2006-07 ONWARDS. WHERE THE ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF FINANCING AND INVESTMENTS IN SHARES IN SECURITIES, SUFFERED L OSS 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 43 (5) AND THE ASSESSING OFFICER WAS RIGHT IN TREATING THE LOSS AS SPECULATI ON 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. 6. SINCE THE ORDER OF THE CIT(A) IS IN LINE WITH THE P RINCIPLES ESTABLISHED BY THE SPECIAL BENCH(SUPRA), WE ARE OF THE OPINION THAT THERE IS NO NEED TO DIFFER FROM THE ORDER. ACCORDINGLY ASSESSEES GROUN DS ARE REJECTED. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH MARCH 2010. SD/- SD/- (R.K. GUPTA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 11 TH MARCH 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XIII, MUMBAI 4. THE CIT XIII, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P. ITA NO. 4716/MUM/2008 M/S. RAMESH KUMAR GOPALDAS 5 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 03.02.10 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 05.02.10 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR. PS/PS 7 FILE SENT TO THE BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER