Sh. Kamal Kishore, Delhi V. ACIT, New Delhi

ITA 4952/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6842 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC 3
• Next Hearing Date: 15-11-2016
• Assessment Year: 2013-2014
• Appeal Filed On: 16-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Keywords: Transactions in derivatives; Speculation loss
• Section: 143(3); 43(5); 54; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC - 3 BENCH, NEW DELHI BEFORE SHRI . N.K. SAINI, ACCOUNTANT MEMBER ITA N O. 4952 / DEL /201 6 A SSESSMENT YEAR: 20 13 - 14 KAMAL KISHORE 7, P.S., JAIN MARKET, KASHMERE GATE DELHI PAN - AAFPK3889E VS. ACIT CIRCLE - 35(1), 10 TH FL OOR, CIVIC CENTRE, BLOCK - E - 2, JLN MARG NEW DELHI PIN - 110002 (APPELLANT) (RESPONDENT) APPELLANT BY : SH. R.S. SINGHVI & SATYAJEET GOEL, CA RESPONDENT BY : SHRI. S.K. JAIN , SR. (DR) DATE OF HEARING : 15 - 1 1 - 201 6 DATE OF PRONOUNCEMENT : 0 - 02 - 201 7 O R D E R PER N.K. SAINI , A .M . : THIS APPEAL BY THE ASSESSEE HAS BEEN FILED AGAINST THE ORDER OF THE CIT(A) DATED 26 .07 .2016 FOR AY 2013 - 201 4 . THE GROUNDS RAISED BY THE ASSESSEE READ AS FOLLOWS : 1 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) WAS NO JUSTIFIED IN ENDORSING ADJUSTMENT LEADING TO ENHANCEMENT OF RETURNED INCOME BY RS. 15,50,100/ - VIDE INTIMATION U/S. 143(1) OF THE ACT DT. 10.09.2014. 2 (I). THAT ADJUSTMENT MADE IN THE INTIMATION U/S. 143(1) OF THE ACT WITH REFERENCE TO CLAIM OF BUSINESS LOSS AMOUNTING TO RS. 15,50,100/ - ON ACCOUNT OF DERIVATIVE LOSS ON CURRENCY TRANSACTIONS WAS WITHOUT ANY LEGAL BASIS. 2 ITA NO. 4952 /DEL/201 6 II . THAT CLAIM OF CURRENCY LOSS RELATING TO DERIVATIVE TRANSACTION S CARRIED OUT AT RECOGNIZED STOCK EXCHANGE IS IN THE NATURE OF BUSINESS LOSS AS PER SEC. 2 (AC) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956. II . THAT THE CIT(A) HAS NOT PROPERLY APPRECIATED THE OBJECT AND SCOPE OF SEC. 2(AC) OF THE SECURITIES CONT RACTS (REGULATION) ACT, 1956 AND AS SUCH CONFIRMATION OF ADJUSTMENT IN THE INTIMATION U/S. 143(1) IS NOT JUSTIFIED UNDER THE LAW. 3. THAT EVEN OTHERWISE, ADJUSTMENT IN THE INTIMATION U/S. 143(1) IS NOT JUSTIFIED AS SAME IS NOT THE NATURE OF ANY ARITHMETICA L ERROR OR AN INCORRECT CLAIM AND AS SUCH ADJUSTMENT IN THE INTIMATION IS ILLEGAL, ARBITRARY AND WITHOUT JURISDICTION. THAT INTIMATION U/S. 143(1) AND ORDER OF THE CIT(A) ARE NOT SUSTAINABLE ON FACTS AND UNDER THE LAW IN RESPECT OF CLAIM OF BUSINESS LOSS R ELATING TO CURRENCY DERIVATIVE TRADING. 2. THE ONLY GRIEVANCE OF THE ASSESSEE IN THIS APPEAL RELATES TO THE ADJUSTMENT OF DERIVATIVES LOSS AMOUNTING TO RS. 15,50,100/ - . FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE FILED HIS RETURN OF INCOME DECLARING AN INCOME OF RS. 23,52,140/ - . THE AO MADE THE ADJUSTMENT OF RS. 15,50 ,100/ - VIDE INTIMATION DATED 26.03.2015 U/S 143(1) OF THE INCOME TAX ACT, 1961 ( HEREINAFTER REFERRED AS THE ACT). 3. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A ) AND MADE THE SUBMISSIONS DATED 23.6.2016 , WHICH ARE REPRODUCED VERBATIM UNDER: 3.1 THAT THE ID. AO WRONGLY DISALLOWED SET OFF OF CLAIMED BUSINESS LOSS OF RS. 1550100/ - AGAINST INCOME UNDER OTHER HEAD OF INCOME DECLARED 3 ITA NO. 4952 /DEL/201 6 IN THE IT RETURN. 3.2 THAT THE ID. AO ERRED IN LAW ON FACTS IN NOT ALLOWING THE BENEFIT OF S. 71 OF THE ACT WHICH ALLOWS THE ASSESSEE THE BENEFIT OF BUSINESS LOSS TO BE SET OFF AGAINST HIS INCOME ASSESSABLE FOR THAT ASSESSMENT YEAR UNDER ANY OTHER HEADS OF INCOME. 3.3 THAT INTIMATION DT. 1 0/09/2014 AS PER WHICH INCOME WAS COMPLETED AT RS. 3902236/ - IS ILLEGAL, ARBITRARY AND CONTRARY TO SCHEME OF THE ACT. 4. THAT THE ID. AO COMMITTED A GRAVE MISTAKE OF LAW BY EXCEEDING THE POWERS GRANTED UNDER THE PROVISIONS OF S. 143(1) OF THE ACT BY DISALL OWING THE CLAIMED BUSINESS LOSS OF RS. 1550100/ - AGAINST INCOME SHOWN UNDER OTHER HEADS OF INCOME. THE ID. AO IGNORED THE FACT THAT UNDER THE PROVISION OF S. 143(1) OF THE ACT, HE IS EMPOWERED TO MAKE THE ADJUSTMENT FOR ANY ARITHMETICAL ERROR IN THE RETURN OR AN INCORRECT CLAIM IF SUCH INCORRECT CLAIM IS APPARENT FROM ANY INFORMATION IN THE RETURN. AN INCORRECT CLAIM APPARENT FROM ANY INFORMATION IN THE RETURN SHALL MEAN A CLAIM, ON THE BASIS OF AN ENTRY, IN THE RETURN OF AN ITEM WHICH IS INCONSISTENT WITH ANOTHER ENTRY OF THE SAME OR SOME OTHER ITEM IN SUCH RETURN. 5. THE ID. AO IGNORED THE FACTS THAT HE CANNOT EXCISE THE POWER OF SECTION 143(3) OF THE ACT IN THE GUISE OF PRIMA FACIE ADJUSTMENT AS DEFINED IN S. 143(1) OF THE ACT. THERE HAS TO BE SOME MATERI AL ON RECORD TO JUSTIFY HIS ACTION THAT CLAIMED BUSINESS LOSS SET OFF U/S 71 OF THE ACT WAS PRIMA FACIE INADMISSIBLE UNDER THE PROVISIONS OF THE ACT. 6. THE ID. AO DID NOT MENTION ANY REASON/GROUND IN THE IT ORDER THAT THE CLAIMED BUSINESS LOSS OF ASSESSEE WAS INCONSISTENT AND/OR OTHERWISE INADMISSIBLE FOR SET OFF AGAINST OTHER HEADS OF INCOME SHOWN IN THE IT RETURN OR WAS CONTRARY TO THE PROVISION OF THE ACT. 7. THE ID. AO INCORRECTLY MADE PRIMA FACIE ADJUSTMENT IN THE IT ORDER U/S 143(1) OF THE ACT WHICH IS BAD IN LAW . 8. CASE RELIED UPON: CIT VS. SMT. A. E. SAROJINI (2007) 295 ITR 270 (MAD). IN THIS CASE THE HON 'BLE COURT HELD THAT THE DISALLOWANCE OF CLAIM MADE IN THE IT RETURN CANNOT BE MADE UNDER THE PRIMA FACIE 4 ITA NO. 4952 /DEL/201 6 ADJUSTMENT U/S 143(L)(A) OF THE ACT.. A DEBATABLE ISSUE CAN NEVER BE A SUBJECT MATTER FOR CONSIDERATION WHILE PASSING AN ORDER U/S 143(1) OF THE ACT. [FACTS: IN THIS CASE THE ASSESSEE CLAIMED EXEMPTION U/S 54 OF THE ACT FOR MAKING INVESTMENT IN THE CONSTRUCTION OF ADDITIONAL FLOOR OF EXISTING BUILDING. THE ID. AO DISALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSEE HAD A RESIDENTIAL HOUSE AT THE TIME OF SALE OF THE VACANT SITE AND THAT THE SALE PROCEEDS WERE UTILIZED FOR EXTENSION OF THE EXISTING BUILDING]. 9. THAT THE ID. AO IGNORED THE FACT THAT WHILE PROCESSING RETURN U/S 143(1) OF THE ACT IT IS NOT OPEN TO DISREGARD INCOME AS DECLARED IN THE RETURN EXCEPT ADJUSTMENT FOR ARITHMETICAL ERROR OR INCORRECT APPARENT CLAIM. THE ID. AO WRONGLY IGNORED THE FACT THAT EVEN IF THERE IS ANY DEFECT OR DE FICIENCY IN THE CLAI M OF THE ASSESSEE, A DEFICIENCY NOTICE SHOULD HAVE BEEN SENT TO HIM U/S 139(9) OF THE ACT. WITHOUT COMPLYING WITH THE MANDATE GIVEN IN THE SECTION THE IT ORDER IDS 143(1) IS ILLEGAL AND INVALID. THAT THE ADJUSTMENT MADE OF CLAIMED BUSIN ESS LOSS DISALLOWING SET OFF OF THE SAME AGAINST OTHER HEADS OF INCOME IN THE IT RETURN WHICH IS AS PER THE PROVISION OF THE ACT IS BAD IN LAW AND CONTRARY> TO THE PROVISION OF THE ACT. 10. THE ID. AO WRONGLY IGNORED THE CBDT CIRCULAR NO. 689 DT. 24.08.199 4 IN WHICH THE BOARD HAS CLARIFIED THAT THE AO CAN MAKE PRIMA FACIE ADJUSTMENT OF THE CLAIM MADE IN THE IT RETURN WHICH IS PATENTLY INADMISSIBLE IN LAW. IN OTHER WORDS ANY CLAIMED DEDUCTION WHICH IS NOT PRIMA FACIE IN ADMISSIBLE OF NATURE CANNOT BE ADJUSTE D U/S 143(1) OF THE ACT. THAT THE CLAIMED LOSS IS NOT OF PRIMA FACIE INADMISSIBLE IN NATURE, THE SAME HAS WRONGLY BEEN DISALLOWED BY THE ID. AO AND THE SAME IS BAD IN LAW. 11. PRAYER: THE ASSESSEE HUMBLY SUBMITS TO YOUR HONOUR TO ACCEPT HIS CONTENTION AS PER SUBMISSIONS MADE ABOVE AND DELETE THE WRONG PRIMA FACIE ADJUSTMENT MADE U/S 143 (1) OF THE ACT BY THE ID. AO. 4 . THE ASSESSEE AGAIN MADE THE SUBMISSIONS DATED 12.7.2016 , WHICH READ AS UNDER : 2. NATURE OF LOSS CLAIMED OFRS. 15,50,100/ - 5 ITA NO. 4952 /DEL/201 6 2 . 1 THE ASSESSEE DURING THE YEAR UNDER APPEAL DID TRADING IN DERIVATIVES THROUGH CPR CAPITAL SERVICES LTD. STOCK BROKER AND MEMBER OF NATIONAL STOCK EXCHANGE OF INDIA LTD. IN THE DERIVAT IVE TRADING ASSESSEE EARNED PROF IT OF RS. 6,94,490/ - . THE ASSESSEE ALSO DID TRADING IN CURRENCY DERIVATIVES THROUGH THE SAME STOCK BROKER THROUGH UNITED STOCK EXCHANGE LTD. IN THE CURRENCY DERIVATIVES ASSESSEE SUFFERED LOSS OF RS. 22,44,593/ - . THUS ASSESSEE SUFFERED NET LOSS OF RS. 15,50 ,103/ - [6,94,490( - )22,44,593/ - ] IN DERIVATIVE BUSINESS (KNOWN AS ELIGIBLE TRANSACTIONS). 2 . 2 IT IS FURTHER SUBMITTED THAT ASSESSEE DID ELIGIBLE TRANSACTIONS AS PER SECTION 2(AC) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 AS THE SAME WERE DONE ELECTRONICALLY ON SCREEN BASED SYSTEMS THROUGH A STOCK BROKER/S UB - BROKER UNDER S. 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992), IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACT (REGULATION) ACT, (15 OF 1992) OR THE DEPOSITORIES ACT, 1996 (22 OF 1996), AND THE RULES, REGULATIONS O R BYE LAWS ISSUED UNDER THOSE ACTS. THAT ALL THE ELIGIBLE TRANSACTIONS ARE SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY STOCK BROKER. 3. ELIGIBILITY AS BUSINESS LOSS FOR SET OFF AGAINST OTHER HEADS OF INCOME; IS FURTHER SUBMITTED THAT THE CLAIMED L OSS OF RS. 15, 50,103/ - IN DERIVATIVE TRANSACTIONS ARE NORMAL BUSINESS LOSS .AS PER S. .43 ( 5) PROVISO (D) OF THE ACT. AS PER THE PROVISO TO THE SECTION DERIVATIVE TRANSACTIONS DONE THROUGH RECOGNIZED STOCK EXCHANGE ELECTRONICALLY ON SCREEN BASED SYSTEM THR OUGH A STOCK BROKER ARE RECOGNIZED AS NORMAL BUSINESS TRANSACTION , S. THE LOSS SUFFERED INI DERIVATIVE TRANSACTIONS IS ELIGIBLE FOR SET OFF AGAINST OTHER HEADS OF HIS INCOME ASSESSABLE FOR THE ASSESSMENT UNDER ANY OTHER HEAD U/S 71 OF THE INCOME TAX ACT. 3. 1 IT IS FURTHER SUBMITTED THAT TRANSACTIONS DONE THROUGH STOCK EXCHANGES ARE RECOGNIZED STOCK EXCHANGES AS REFERRED IN S. 2(F) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) TO AND WERE CARRIED OUT THROUGH STOCK BROKER, A MEMBER OF BOTH TH E EXCHANGES. THE ASSESSEE IS ENCLOSING HERE WITH THE PHOTO COPY OF THE LETTER OF CPR CAPITAL SERVICE LTD., STOCK BROKER, IN SUPPORT OF THE CONTENTION. IN ITS LETTER THE BROKER HAS CONFIRMED THAT BOTH EXCHANGES ARE RECOGNIZED STOCK EXCHANGE AS PER SEBI GUID ELINES. 4. IN VIEW OF THE ABOVE IT IS REQUESTED TO ACCEPT THE CONTENTION OF THE ASSESSEE AND OBLIGE. 5 . THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE HAS DONE TRADING IN DERIVATIVES THOUGH CPR CAPITAL SERV ICES LIMITED STOCK BROKER OF MEMBER OF NATIONAL STOCK EXCHANGE AND EARNED PROFIT OF RS. 6,94,490/ - IN DERIVATIVE TRADING AND 6 ITA NO. 4952 /DEL/201 6 SUFFERED A LOSS OF RS. 22,44,593/ - IN CURRENCY DERIVATIVES THROUGH UNITED STOCK EXCHANGE LIMITED. THE LEARNED CIT(A) FURTHER OBSERV ED THAT CURRENCY DERIVATIVES CANNOT BE SETTLED BY PHYSICAL DELIVERY BUT CAN ONLY BE SETTLED BY PAYMENT OF DIFFERENCE OR CASH SETTLED. HE ALSO OBSERVED THAT CURRENCY IS A COMMODITY AS IT HAS PHYSICAL EXISTENCE AND CAN BE SUBJECT MATTER OF TRADE THEREFORE C URRENCY DERIVATIVE TRADING IS SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF SECTION 43(5) OF THE INCOME TAX ACT, 19 61. THE LEARNED CIT(A) HELD THAT THE AO WAS CORRECT IN NOT ALLOWING THE ADJUSTMENT WITH BUSINESS LOSS. HE ALSO OBSERVED THAT PROVISIONS OF S ECTION 2(AC) OF THE SECURITIES CONTRACT (REGULATION) ACT, 1956 DO NOT MENTION CURRENCY AS ONE OF THE DERIVATIVES AND THAT THE DEFINITION OF SECURITY IN SECTION 2(H) DOES NOT INCLUDE CURRENCY DERIVATIVES. THE LEARNED CIT(A) HELD THAT THE ASSESSEE CANNOT AVAIL BENEFIT OF SECTION 71 TO ADJUST HIS LOSS FROM OTHER INCOME AS THE LOSSES ARE SPECULATIVE IN NATURE. THE LEARNED CIT(A) ALSO HELD THAT THE AO COULD HAVE MADE ANY ADJUSTMENTS OR DISALLOWANCE TO THE RETURNED INCOME U/S 143(1) OF THE ACT IN ACCORDANCE WI TH THE PROVISIONS CONTAINED IN THE SAID SECTION . NOW, THE ASSESSEE IS IN APPEAL. 6 . THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE SUFFERED BUSINESS LOSS OF RS. 22,4 4,593 / - AND EARNED PROFIT OF RS. 6,94,490/ - ON THE DERIVATIVES TRADING THROUGH UNITED EXCHANGE STOCK EXCHANGE WHICH HAS 7 ITA NO. 4952 /DEL/201 6 BEEN RECOGNIZED BY THE CBDT AS RECOGNIZED STOCK EXCHANGE FOR THE PURPOSE OF SUB CLAUSE (D) OF PROVISO TO CLAUSE 5 OF SECTION 43 OF THE A CT WITH EFFECT FROM 25.02.2011 VIDE CIRCULAR NO. USE/FIN/86/2011 DATED 29.03.2011 . A REFERENCE WAS MADE TO PAGE 16 OF THE ASSESSEE S PAPER BOOK. IT WAS FURTHER SUBMITTED THAT THE TRANSACTION RELATING TO TRADING IN DERIV ATIVES WAS COVERED VIDE CLAUSE (D) OF THE PROVISO TO SECTION 43(5) OF THE ACT AND WAS ENTITLED FOR EXEMPTION FROM BEING TREATED AS SPECULATIVE. T HE ASSESSEE FULFILLED ALL THE CONDITIONS STIPULATED U/S 43(5) OF THE ACT. IT WAS FURTHER SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY FOLLOWING THE DECISION S OF ITAT MUMBAI I : - (I) IVF ADVISORS PRIVATE LIMITED VS. THE ASSTT. COMMISSIONER OF INCOME TAX . 10(1) MUMBAI IN I.T.A. NO. 4798/MUM/2012 FOR THE A.Y. 2009 - 10, ORDER DATED 13.02.2015 (II) INVENTURUS KNOWLEDGE SERVICES (P.) LTD. VS. INCOME TA X OFFICER, MUMBAI , 5(2)(1) (2016) 65 TAXMANN.COM 94 (MUM) . 7 . IN HIS RIVAL SUBMISSIONS , THE LEARNED DR STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE CIT(A). 8 . I HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATE RIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS HAS BEEN DECIDED BY THE ITAT I BENCH MUMBAI IN THE AFORESAID REFERRED CASE OF IVF ADVISORS PRIVATE LIMITED VS. THE ASSTT. COMMISSIONER OF INCOME TAX , RANGE 10 (1), MUMBAI IN ITA 8 ITA NO. 4952 /DEL/201 6 NO. 4798/MUM/2012 FOR THE AY 2009 - 10 WHEREIN VIDE ORDER DATED 13.2.2015, IT HAS BEEN HELD THAT DERIVATIVES TRANSACTION CANNOT BE TERM ED AS SPECULATIVE IN NATURE. THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARA 7.1 TO 7.5 OF THE AFORESAID ORDER WHICH READ AS UNDER: 7.1 THUS, IT CAN BE SEEN THAT THE DERIVATIVES ALSO INCLUDES SECURITIES. THE DEFINITION OF ELIGIBLE TRANSACTION MENTIONED HEREIN ABOVE CLEARLY SHOW THAT THE TRANSACTION MUST HAVE BEEN CARRIED OUT ELECTRONICALLY IN ACCORDANCE WITH THE PROVISIONS OF SECURITIES CONTRACTS (REGULATION) ACT AND THE RULES AND REGULATIONS OR BYE LAWS MADE OR DIRECTIONS ISSUED UNDER THIS ACT OR BY BANKS OR MUTUAL FUNDS ON A RECOGNIZED STOCK EXCHANGE AND WHICH IS SUPPORTED BY TIME STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER OR SUB - BROKER OR INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER AND PERMANENT ACCOUNT NUMBER. 7.2 IT WOULD BE PERTINENT TO CONSIDER THE DECISION OF HON BLE MADRAS HIGH COURT IN THE CASE O F RAJSHREE SUGAR & CHEMICALS LTD. VS. AXIS BANK LTD., AIR 2011 (MAD) 144, WHEREIN THE TERM DERIVATIVE HAS BEEN DEFINED TO INCLUDE FOREIGN CURRENCY AS AN UNDERLYING SECURITY OF THE DERIVAT IVE. THE RELEVANT EXTRACT OF THE CASE IS QUOTED BELOW: WHAT ARE TH ESE DERIVATIVES WHICH HAVE GAINED SUCH A GREAT DEAL OF NOTORIETY? IN SIMPLE TERMS, DERIVATIVES ARE FINANCIAL INSTRUMENTS WHOSE VALUES DEPEND ON THE VALUE OF UNDERLYING FINANCIAL INSTRUMENTS. THE INTERNATIONAL ACCOUNTING STANDARD (IAS) 39, DEFINES DERIVATI VES AS FOLLOWS: A DERIVATIVE IS A FINANCIAL INSTRUMENT: ( A ) WHOSE VALUE CHANGES IN RESPONSE TO THE CHANGE IN A SPECIFIED INTEREST RATE, SECURITY PRICE, COMMODITY PRICE, FOREIGN EXCHANGE RATE, INDEX OF PRICES OR RATES, A CREDIT RATING OR CREDIT INDEX, OR S IMILAR VARIABLE (SOMETIMES CALLED THE UNDERLYING ); ( B ) THAT REQUIRES NO INITIAL NET INVESTMENT OR LITTLE INITIAL NET INVESTMENT RELATIVE TO OTHER TYPES OF CONTRACTS THAT HAVE A SIMILAR RESPONSE TO CHANGES IN MARKET CONDITIONS; AND ( C ) THAT IS SETTLED AT A FUTU RE DATE. 9 ITA NO. 4952 /DEL/201 6 ACTUALLY, DERIVATIVES ARE ASSETS, WHOSE VALUES ARE DERIVED FROM VALUES, OF UNDERLYING ASSETS. THESE UNDERLYING ASSETS CAN BE COMMODITIES, METALS, ENERGY RESOURCES, AND FINANCIAL ASSETS SUCH AS SHARES, BONDS, AND FOREIGN CURRENCIES. 7.3 FURTHER , THE SEBI WEBSITE IN ITS SECTION FREQUENTLY ASKED QUESTION S HAS EXPLAINED DERIVATIVE AS UNDER: Q 1. WHAT ARE DERIVATIVES? A. THE TERM DERIVATIVE INDICATES THAT IT HAS NO INDEPENDENT VALUE, I.E. ITS VALUE IS ENTIRELY DERIVED FROM THE VALUE OF THE UND ERLYING ASSET. THE UNDERLYING ASSET CAN BE SECURITIES, COMMODITIES, BULLION, CURRENCY, LIVE - STOCK OR ANYTHING ELSE. IN OTHER WORDS, DERIVATIVE MEANS A FORWARD, FUTURE OPTION OR ANY OTHER HYBRID CONTRACT OF PRE DETERMINED FIXED DURATION, LINKED FOR THE PURP OSE OF CONTRACT FULFILLMENT TO THE VALUE OF A SPECIFIED REAL OR FINANCIAL ASSET OR TO AN INDEX OF SECURITIES. WITH SECURITIES LAWS (SECOND AMENDMENT) ACT, 1999, DERIVATIVES HAS BEEN INCLUDED IN THE DEFINITION OF SECURITIES. THE TERM DERIVATIVE HAS BEEN DEF INED IN SECURITIES CONTRACTS (REGULATIONS) ACT, AS: A DERIVATIVE INCLUDES: - A. A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CONTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURITY; B. A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES, OF UNDERLYING SECURITIES; IT IS FURTHER PROVIDED BY SEBI THAT IN AUG - 2008 SEBI PERMITTED EXCHANGE TRADED CURRENCY DERIVATIVE. CONSIDERING THE RELEVANT PROVISIONS OF THE RELEVANT ACTS, DISCUSSED HEREIN ABOVE IN THE LIGHT OF HON BLE MADRAS HIGH COURT AND THE ANSWERS GIVEN TO FREQUENTLY ASKED QUESTIONS BY THE SEBI AND THE INCORPORATION OF EXCHANGE TRADED CURRENCY DERIVATIVE FROM AUGUST, 2008, THERE REMAIN NO IOTA OF DOUBT THAT THE TRANSACTION OF THE ASSESSEE CANNOT BE TREATED AS SPECULATIVE TRANSACTION. WE HAVE ALSO GONE THROUGH THE COPIES OF THE CONTRACT NOTES INCORPORATED IN THE PAPER BOOK FILED BEFORE US. A PERUSAL OF THE CONTRACT NOTE SHOWS THAT THE ASSESSEE HAS EITHER ENTERED INTO CALL OPTION OR PUT OPTION AND ON THE SETTLEMENT DAY THE TRANSACTION 10 ITA NO. 4952 /DEL/201 6 HAS BEEN SETTLED BY DELIVERY, EITHER THE ASSESSEE HAS PAID US DOLLAR ON THE SETTLEMENT DAY OR HAS TAKEN DELIVERY OF US DOLLAR. TO SUM UP, THE DERIVATIVES INCLUDE FOREIGN CURRENCY AND CALL OPTION/ PUT O PTION, ARE TRANSACTIONS OF DERIVATIVE MARKETS AND CANNOT BE TERMED AS SPECULATIVE IN NATURE. CONSIDERING THE TOTALITY OF THE FACTS AND IN THE LIGHT OF THE JUDICIAL DISCUSSION HEREIN ABOVE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF LD. CIT(A). APP EAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 9 . A SIMILAR VIEW HAS BEEN TAKEN IN THE AFORESAID REFERRED TO CA SE OF INVENTURUS KNOWLEDGE SERVICES (P.) LTD. VS. INCOME TAX OFFICER, MUMBAI, 5(2)(1) I (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER: WE HAVE OBSERVED THAT THE ASSESSEE COMPANY HAS ENTERED INTO DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY THROUGH SEBI REGISTERED BROKER WHO IS A MEMBER NATIONAL STOCK EXCHANGE OF INDIA LIMITED AND THESE DERIVATIVE TRANSACTIONS ARE CARRIED ON THROUGH NATIONAL STOCK EXCHANGE OF INDIA WHICH IS A RECOGNIZED STOCK EXCHANGE AND THESE TRANSACTIONS ARE BACKED BY TIME STAMPED CONTRACT NOTES CARRYING UNIQUE CLIENT IDENTITY NUMBER AND PAN ALLOTTED UNDER THE ACT. THE RELIANCE OF THE LD. DR ON THE CASE OF ARASKA DIAMOND (P.) LTD . ( SUPRA) IS MISCONCEIVED AS IN THIS CASE THE ASSESSEE DID NOT FULFILL THE CONDITIONS AS STIPULATED UNDER SECTION 43(5) OF THE ACT READ WITH PROVISO AND EXPLANATION THERETO TO ENTITLE THE ASSESSEE TO BRING FORWARD CONTRACT IN FOREIGN CURRENCY WITHIN FOUR C ORN ERS OF EXEMPTION FROM BEING TREATED AS NON - SPECULATIVE TRANSACTION AS PER MANDATE OF SECTION 43(5) OF THE ACT. THUS, WE HOLD THAT THESE DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY AS ENTERED INTO BY THE ASSESSEE COMPANY DULY FULFILL ALL THE CONDITIONS A S SPECIFIED U/S 43(5) OF T HE ACT READ WITH PROVISO (D) AND EXPLANATION 1 TO SECTION 43(5) OF THE ACT. WE FURTHER HOLD THAT THESE TRANSACTIONS ARE COVERED B Y THE EXCEPTION AS CONTAINED IN PROVISO (D) TO SECTION 43(5) OF THE ACT AND HENCE ARE NOT SPECULAT IV E TRANSACTIONS AS DEFINED UNDER SECTION 43(5) OF THE ACT. THUS, WE HOLD THAT LOSS OF RS. 1,09,98,56 / - INCURRED BY THE COMPANY ON DERIVATIVE TRANSACTIONS IN FOREIGN CURRENCY IN THE INSTANT APPEAL IS NOT A SPECULATIVE LOSS WITHIN THE DEFINITION AS CONTAINED IN SECTION 43(5) OF THE ACT. 10 . IN MY OPINION, THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO CASES, I THEREFORE, BY RESPECTFULLY 11 ITA NO. 4952 /DEL/201 6 FOLLOWING THE ORDER S OF THE COORDINATE BENCH SET ASIDE THE IMPUGNED ORDER AND DIRECT THE AO NOT TO CONSIDER THE DERIVATIVES LOSS SUFFERED BY THE ASSESSEE AS SPECULATIVE IN NATURE. 11 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF FEBRUARY , 201 7 . SD/ - N.K. SAINI (ACCOUNTANT MEMBER ) DATED 13 - 02 - 201 7 SH COPY OF ORDER TO : - 1 ) THE APPELLANT; 2 ) THE RESPONDENT; 3 ) THE CIT ; 4 ) THE CIT(A) - , NEW DELHI ; 5 ) THE DR, I.T.A.T., NEW DELHI ; BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT , NEW DELHI 12 ITA NO. 4952 /DEL/201 6 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 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 BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE ON WHICH FILE GOES TO THE A.R. 10 DATE OF DISPATCH OF ORDER