DEVESH N SHAH, MUMBAI V. ITO 7(2)(4), MUMBAI

ITA 778/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2358 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 04-11-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 03-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY R PARIKH
• Keywords: Business income; Salary income; Transactions in derivatives; Speculation loss
• Section: 143(3); 14A; 43(5); 12; 28

Judgement Text

D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.778 /MUM/2014 ( / ASSESSMENT YEAR : 2009-10) DEVESH N. SHAH, RASHMI ZAVERI & CO., CHARTERED ACCOUNTANTS, ARHAM, GROUND FLOOR, PLOT 266, SION (E), MUMBAI 400022. / V. INCOME TAX OFFICER, 7(2)(4), MUMBAI. ./ PAN : ABVPS5960P ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SHRI SANJAY R. PARIKH REVENUE BY : SHRI SUNIL KUMAR AGARWAL, JCIT / DATE OF HEARING : 25-05-2016 / DATE OF PRONOUNCEMENT : 29-07-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE ASSESSEE, BEING ITA NO. 778/MUM/2014, IS DIRECTED AGAINST THE APPELLATE ORDER DATED 5 TH DECEMBER, 2013 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 13, M UMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2009- 10, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 24 TH NOVEMBER, 2011 PASSED BY THE LEARNED ASSESSING OFF ICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INC OME TAX ACT,1961 (HEREINAFTER CALLED THE ACT). ITA 778/MUM/2014 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE INCOME TAX APPELLATE TRIBUNAL, MUMBA I (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ASSESSING OFFICER HAS ERRED IN DISALLOWING RS 24,907 U/S 14A OF THE INCOME TAX ACT, 1961. 2. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED ASSESSING OFFICER HAS ERRED IN DISALLOWING CARRIED FORWARD AND SET OFF OF RS. 20,83,591 BEING SPECULATIVE LOSS OF A .Y 2006-07 ON ACCOUNT OF F & O TRANSACTIONS. YOUR APPELLANT SUBMITS THAT THE FULL AMOUNT OF RS. 20,83,591 SHOULD BE ALLOWED TO BE CARRI ED FORWARD AND SET OFF AGAINST BUSINESS INCOME OF THE YEAR UNDER A PPEAL U/S 43(5)(D). 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A DIRECTOR IN M/S SURAJ TOOLS & EQUIPMENTS (P) LTD. AND M/S RONTGEN SAWS (P ) LTD. THE ASSESSEE HAS SHOWN INCOME FROM SALARY AND INCOME FROM OTHER SOUR CES. IT WAS OBSERVED BY THE AO FROM THE RETURN OF INCOME FILED FOR THE ASSESSMENT YEAR 2006-07 THAT THE ASSESSEE HAS HIMSELF SHOWN SP ECULATION LOSS OF RS. 20,83,591/- ON ACCOUNT OF TRANSACTION IN F&O BUT TH E SAME WAS SET OFF AGAINST THE NORMAL BUSINESS BY THE ASSESSEE DURING THE YEAR. FURTHER, THE LOSS INCURRED BY THE ASSESSEE IN F & O TRANSACTIONS IN NATIONAL STOCK EXCHANGE OF INDIA OR IN BOMBAY STOCK EXCHANGE, WERE INCURRED ON A DATE PRIOR TO 25.01.2006 I.E. THE DATE OF THEIR BEING NO TIFIED AS 'RECOGNIZED STOCK EXCHANGE' FOR THE PURPOSE OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT WHICH CANNOT BE TREATED AS A TRANSACTION COVERED BY THE SAID PROVISION, AND WAS CONSIDERED WITHIN THE DEFINITION OF 'SPECULATIV E TRANSACTION'. SINCE THE ASSESSEE HAS INCURRED LOSS IN RESPECT OF F&O TRANSA CTIONS BEFORE 25 TH JANUARY, 2006 OF RS.20,83,591/- WHICH CANNOT BE TRE ATED AS NORMAL BUSINESS LOSS AS THE TRANSACTION IN F & O BEFORE 25 TH JANUARY, 2006 I.E. PRIOR TO THE DATE WHEN THE STOCK EXCHANGE WAS NOTIFIED AS RECOGN IZED STOCK EXCHANGE FOR ITA 778/MUM/2014 3 THE PURPOSE OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT, AND EVEN THOUGH CLAUSE (D) COME INTO EFFECT FROM 1 ST APRIL, 2006, THE IMPUGNED TRANSACTIONS BEFORE 25 TH JANUARY, 2006 DID NOT SATISFY THE REQUIREMENTS OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT AS IT WAS NOT CARRIED OUT THROUGH RECOGNIZED STOCK EXCHANGE, THUS, THE A.O. T REATED THE LOSS ON F & O OF RS.20,83,591/- PRIOR TO 25.01.2006 AS SPECULATIO N LOSS EVEN THOUGH THE ASSESSEE HIMSELF TREATED AS SPECULATION LOSS AND IS ALLOWED TO BE SET OFF AGAINST SPECULATION INCOME OF THE ASSESSEE, VIDE AS SESSMENT ORDER DATED 24- 11-2011 PASSED BY THE AO U/S 143(3) OF THE ACT. SIMILARLY, ADDITION WAS MADE BY THE A.O. OF RS. 24, 907/- AND THE SAID SUM WAS ADDED BACK TO THE INCOME OF THE ASSESSEE U/S 14 A OF THE ACT BY APPLYING RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962 BEING 0.5% OF AVERAGE VALUE OF INVESTMENT HELD BY THE ASSESSEE ,VIDE ASSESSMENT OR DER DATED 24-11-2011 PASSED BY THE AO U/S 143(3) OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 24-11-20 11 PASSED BY THE A.O. U/S. 143(3) OF THE ACT, THE ASSESSEE FILED FIRST AP PEAL BEFORE THE LD. CIT(A) WHICH APPEAL STOOD DISMISSED BY THE LEARNED CIT(A) ON BOTH THE ABOVE ISSUES AGITATED BY THE ASSESSEE BEFORE THE LEARNED CIT(A) VIDE APPELLATE ORDERS DATED 05-12-2013. 5. AGGRIEVED BY THE APPELLATE ORDER DATED 05.12.201 3 PASSED BY LEARNED CIT(A) , THE ASSESSEE FILED SECOND APPEAL WITH THE TRIBUNAL. 6. WITH RESPECT TO THE DISALLOWANCE OF RS. 24,907 U /S 14A OF THE ACT AGITATED BY THE ASSESSEE VIDE GROUND NO. 1 IN THE M EMO OF APPEAL FILED WITH THE TRIBUNAL, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE ASSESSEE DID NOT WISH TO PRESS THE SAID GROUND NO. 1 AND THE SAM E MAY BE DISMISSED AS NOT BEING PRESSED. THE LD. D.R. HAS ALSO NOT RAISE D ANY OBJECTION WITH RESPECT ITA 778/MUM/2014 4 TO DISMISSAL OF THE ABOVE GROUND NO. 1 RAISED BY TH E ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE TRIBUNAL . ACCORDINGLY WE OR DER DISMISSAL OF GROUND NO. 1 WITH RESPECT TO DISALLOWANCE OF RS. 24,907/- U/S 14A OF THE ACT AS NOT BEING PRESSED. WE ORDER ACCORDINGLY. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH EXPLANATION WAS INS ERTED INTO THE STATUTE BY FINANCE ACT, 2005 W.E.F. 01-04-2006 APPLICABLE FROM THE ASSESSMENT YEAR 2006-07 AND SUBSEQUENT ASSESSMENT YEARS , WHEREBY E LIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES ON RECOGNIZED STO CK EXCHANGES SHALL NOT BE TREATED AS SPECULATIVE TRANSACTION. THE ASSESSEE HA D ENTERED INTO F & O TRANSACTIONS AND INCURRED LOSSES , WHICH TRANSACTIO N WAS DERIVATIVE TRANSACTIONS WHICH COMPLIED WITH ALL THE REQUIREMEN TS OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH EXPLANATION EXCEPT THAT IT WAS ENTERED INTO PREVIOUS YEAR 2005-06 PRIOR TO 25-01-2006 .IT WAS SUBMITTED THAT THE NATIONAL STOCK EXCHANGE/BOMBAY STOCK EXCHANGE WERE RECOGNISED VIDE NOTIFICATION ISSUED BY CENTRAL GOVERNMENT ON 25 TH JANUARY, 2006 WHICH IS TO BE TREATED AS RETROSPECTIVE W.E.F. 01-04-2005 TO CO VER THE ENTIRE PREVIOUS YEAR 2005-06 , WHEREBY LOSSES INCURRED ON ELIGIBLE DERIV ATIVE TRANSACTION UNDERTAKEN IN THE PREVIOUS YEAR 2005-06 RELEVANT TO ASSESSMENT YEAR 2006- 07 SHALL NOT BE TREATED AS SPECULATIVE AND HENCE LO SSES INCURRED IN F & O IN PREVIOUS YEAR 2005-06 SHOULD BE TREATED AS BUSINESS LOSS AND NOT SPECULATIVE LOSS AS PER PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH EXPLANATION. THE LD. COUNSEL RELIED ON THE DECISION S OF THE MUMBAI TRIBUNAL IN THE CASE OF PREM ASSOCIATES ADVERTISING & MARKE TING V. JCIT IN ITA NO. 6547/MUM/2009 FOR ASSESSMENT YEAR 2006-07 VIDE ORD ERS DATED 17-09- 2010, DECISION IN THE CASE OF SHRI ARVIND KANJI CH HEDA V. ACIT IN ITA NO. 2295/MUM/2012 FOR THE ASSESSMENT YEAR 2008-09 DATED 2 ND DECEMBER, 2014 AND DECISION IN THE CASE OF GAJENDRA KUMAR T. AGARW AL V. ITO REPORTED IN [2011] 11 ITR (TRIB) 640 (MUMBAI) , AND CONTENDED T HAT THE ASSESSEE HAS ITA 778/MUM/2014 5 INCURRED LOSSES IN ELIGIBLE DERIVATIVES TRANSACTION S IN THE ASSESSMENT YEAR 2006-07 WHICH WERE ENTERED INTO PRIOR TO 25-01-2006 I.E. DATE OF NOTIFICATION OF NSE AND BSE AS RECOGNIZED STOCK EXCHANGES AND TH E LOSSES SHOULD BE ALLOWED AS NORMAL BUSINESS LOSS. 8. THE LD. D.R., ON THE OTHER HAND, RELIED ON THE O RDERS OF AUTHORITIES BELOW. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND ALS O PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE CASE LAWS CITED B EFORE US. THE ASSESSEE HAD INCURRED LOSSES OF RS.20,83,591/- IN F & O TRANSACTIONS WHICH ARE DERIVATIVE TRANSACTIONS IN THE ASSESSMENT YEAR 2006-07 WHICH THE ASSESSEE IS SEEKING TO BE ALLOWED TO BE CARRIED FOR WARD AS NON-SPECULATIVE LOSSES AND TO GET IT ADJUSTED AGAINST NORMAL BUSIN ESS INCOME IN THE INSTANT ASSESSMENT YEAR 2009-10 UNDER APPEAL. THE SAID F & O LOSS HAD OCCURRED IN THE PREVIOUS YEAR 2005-06 ITSELF BUT PRIOR TO 25 TH JANUARY 2006 ON WHICH DATE THE NATIONAL STOCK EXCHANGE(NSE) AND BOMBAY STOCK E XCHANGE(BSE) WERE NOTIFIED BY CENTRAL GOVERNMENT AS RECOGNIZED STOCK EXCHANGES IN ACCORDANCE WITH THE POWERS CONFERRED BY CLAUSE (II) IN THE EXP LANATION TO CLAUSE (D) OF THE PROVISO TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH RULE 6DDB OF THE INCOME TAX RULES, 1962 VIDE NOTIFICATION NO 2/2006 (SO 89(E) , DATED 25-01- 2006 ( F.NO. 142/38/2005-TPL) WHICH NOTIFICATION AL ONG WITH EXPLANATORY MEMORANDUM IS REPRODUCED HEREUNDER : SECTION 43(5), CLAUSE (II) OF EXPLANATION TO CLAUS E (D) OF PROVISO OF THE INCOME-TAX ACT, 1961 RECOGNISED STOCK EXCHANGE NOTIFIED STOCK EXCHANGES NOTIFICATION NO. 2/2006 [SO 89 (E)], DATED 25-1-200 6 ITA 778/MUM/2014 6 IN EXERCISE OF THE POWERS CONFERRED BY CLAUSE (II) IN THE EXPLANATION TO CLAUSE (D) OF THE PROVISO TO CLAUSE (5) OF SECTION 43 OF THE INCOME-TAX ACT, 1961(43 OF 1961) READ WITH SUB-RULE (4) OF RULE 6DD B OF THE INCOME- TAX RULES, 1962, THE CENTRAL GOVERNMENT HEREBY NOTI FIES THE FOLLOWING STOCK EXCHANGES AS RECOGNISED STOCK EXCHANGES FOR T HE PURPOSES OF THE SAID CLAUSE WITH EFFECT FROM THE DATE OF PUBLICATIO N OF THIS NOTIFICATION.IN THE OFFICIAL GAZETTE, NAMELY:- (1) NATIONAL STOCK EXCHANGE OF INDIA LIMITED, MUMBA I (2) BOMBAY STOCK EXCHANGE LIMITED, MUMBAI 2. THE CENTRAL GOVERNMENT MAY WITHDRAW THE RECOGNIT ION GRANTED TO THE STOCK EXCHANGE IF ANY OF THE CONDITIONS PRESCRI BED IN RULE 6DDA OF THE INCOME-TAX RULES, 1962, SUBJECT TO WHICH THE RECOGNITION IS GRANTED, IS VIOLATED. 3. THIS NOTIFICATION SHALL REMAIN IN FORCE UNTIL TH E APPROVAL GRANTED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA IS WITHD RAWN OR EXPIRES, OR THIS NOTIFICATION IS RESCINDED BY THE CENTRAL GOVER NMENT AS PROVIDED IN SUB-RULE (5) OF RULE 6DDB OF THE INCOME-TAX RULES, 1962. [F.NO. 142/38/2005-TPL] EXPLANATORY MEMORANDUM IN RESPECT OF NOTIFICATION S . O. 89(E) DATED 25 TH JANUARY, 2006 THE SAID NOTIFICATION NOTIFIES BOMBAY STOCK EXCHANG E LIMITED, MUMBAI AND NATIONAL STOCK EXCHANGE OF INDIA LIMITED, MUMBA I AS RECOGNISED STOCK EXCHANGES FOR THE PURPOSES OF CLAUSE (D) OF T HE PROVISO TO SECTION 43(5) OF THE INCOME-TAX ACT, 1961. AN ELIGIBLE TRAN SACTION IN RESPECT OF TRADING IN DERIVATIVES CARRIED OUT ON THESE TWO STO CK EXCHANGES WITH EFFECT FROM 25 TH JANUARY, 2006 SHALL NOT BE DEEMED TO BE SPECULATIV E TRANSACTION. THE EXPRESSION ELIGIBLE TRANSACTION IS DEFINED IN THE EXPLANATION APPEARING AFTER THE PROVISO TO SECTION 43(5) OF THE INCOME-TAX ACT, 1961. AS PER ABOVE NOTIFICATION , AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES CARRIED OUT ON THESE TWO STOCK EXCHANGE S NSE AND BSE WITH EFFECT FROM 25 TH JANUARY, 2006 SHALL NOT BE DEEMED TO BE SPECULATIV E TRANSACTION, WHILE IN THE INSTANT CASE THE ASSESSEE INCURRED F & O LOSSES I.E. ITA 778/MUM/2014 7 IN DERIVATIVE TRANSACTIONS DURING THE PREVIOUS YEAR 2005-06 BUT PRIOR TO 25- 01-2006 AND IS SEEKING CARRYING FORWARD AS NON-SPEC ULATIVE LOSSES AND ADJUSTMENT AGAINST THE NORMAL BUSINESS INCOME FOR T HE IMPUGNED ASSESSMENT YEAR 2009-10, BY TREATING THE SAID LOSS ES AS NON-SPECULATIVE IN NATURE WHILE NOTIFICATION ALLOW SUCH LOSSES TO BE T REATED AS NON-SPECULATIVE ONLY WITH RESPECT TO TRANSACTIONS IN DERIVATIVES UN DERTAKEN ON NSE/BSE W.E.F. 25-01-2006. BEFORE WE PROCEED FURTHER, IT WOULD BE RELEVANT TO ANALYSE THE PROVISIONS OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH EXPLANATION WHICH WAS INTRODUCED IN STATUTE BY FINANCE ACT, 2005 W.E. F. 01-04-2006 AND ARE APPLICABLE FOR ASSESSMENT YEAR 2006-07 AND SUBSEQUE NT ASSESSMENT YEARS READS AS UNDER: 'DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOME FR OM PROFITS AND GAINS OF BUSINESS OR PROFESSION. 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLES S THE CONTEXT OTHERWISE REQUIRES- XX (5) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION I N WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DEL IVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) TO (C) XX ITA 778/MUM/2014 8 (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGU LATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE ; OR (E) XX SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . EXPLANATION - FOR THE PURPOSES OF CLAUSE (D), THE EXPRESSIONS- (I) 'ELIGIBLE TRANSACTION' MEANS ANY TRANSACTION,- (A) CARRIED OUT ELECTRONICALLY ON SCREEN- BASED SYSTEMS THROUGH A STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMED IARY REGISTERED UNDER SECTION 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (1 5 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (RE GULATION) ACT, 1956 (42 OF 1956) OR THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR THE DEPOSITORIES ACT, 1996 (22 OF 1996) AND THE RUL ES, REGULATIONS OR BYE- LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BA NKS OR MUTUAL 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 I NDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY ACT REFERRED TO IN SUB-CLAUSE (A ) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; (II) 'RECOGNISED STOCK EXCHANGE' MEANS A RECOGNISED STOC K EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECUR ITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFI LS SUCH CONDITIONS AS MAY BE PRESCRIBED AND NOTIFIED BY THE CENTRAL GOVER NMENT FOR THIS PURPOSE ;' ITA 778/MUM/2014 9 SECTION 43(5) OF THE ACT PROVIDES THAT A TRANSACTIO N IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVER Y OR TRANSFER OF THE COMMODITY OR SCRIPS SHALL BE SPECULATIVE TRANSACTIONS , WHILE PR OVISO(D) TO SECTION 43(5) OF THE ACT INTER-ALIA PROVIDES THAT AN ELIGIBLE TRANSACTION IN RESPECT O F TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECU RITIES CONTRACTS(REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHA LL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. IT IS AN ADMITTED POSITION BETWEEN THE RIVAL PARTIES THAT F & O TRANSACTIONS I.E. DERIVATIVE TRANSACTION WHICH TH E ASSESSEE UNDERTOOK ON WHICH THE ASSESSEE SUSTAINED LOSS OF RS.20,83,591/- WAS OTHERWISE QUALIFYING ALL THE CONDITIONS AS STIPULATED BY THE PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH EXPLANATION , EXCEPT THAT IT WAS CARRIED OUT BY THE ASSESSEE IN THE PREVIOUS YEAR 2005-06 PRIOR TO 25-01-2006 WHEN NSE/BSE WERE BEIN G NOTIFIED AS RECOGNIZED STOCK EXCHANGES BY CENTRAL GOVERNMENT ON 25-01-2006 VIDE NOTIFICATION NO. 2/2006 (SO 89(E)) , DATED 25-01-2006. THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FIN ANCE BILL, 2005 WHICH INTRODUCED CLAUSE (D) ((2005) 194 CTR(ST.) 147 , TH E PURPOSE OF INTRODUCTION OF CLAUSE (D) HAS BEEN EXPLAINED, WHICH READS AS UNDER : 'MEASURES TO RATIONALIZE THE TAX TREATMENT OF DERIV ATIVE TRANSACTION UNDER THE EXISTING PROVISIONS (CL.(5) OF S.43) A TR ANSACTION FOR THE PURCHASE AND SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES I S DEEMED TO BE A 'SPECULATIVE TRANSACTION', IF IT IS SETTLED OTHERWISE THAN BY AC TUAL DELIVERY. HOWEVER, CERTAIN CATEGORIES OF TRANSACTIONS ARE EXCLUDED FROM THE PU RVIEW OF SAID PROVISION. FURTHER, THE UNABSORBED SPECULATION LOSSES ARE ALLO WED TO BE CARRIED FORWARD FOR EIGHT YEARS FOR SET-OFF AGAINST SPECULATION PROFITS IN SUBSEQUENT YEARS. THESE RESTRICTIONS WERE ESSENTIALLY DESIGNED AS AN ANTI- EVASION MEASURE TO PREVENT CLAIMS OF ARTIFICIALLY GENERATED LOSSES IN THE ABSENCE OF AN APPROPRIATE INSTITUTIONAL INFRASTRUCTURE. ITA 778/MUM/2014 10 RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCE D BY STOCK MARKETS HAVE RESULTED IN SUFFICIENT TRANSPARENCY TO PREVENT GENERATING FICTITIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. THE SCREEN BASED COMPUTERIZE D TRADING PROVIDES FOR AN EXCELLENT AUDIT TRAIL. THEREFORE, THE PRESEN T DISTINCTION BETWEEN SPECULATIVE AND NON- SPECULATIVE TRANSACTIONS, PART ICULARLY RELATING TO DERIVATIVES IS NO MORE REQUIRED. THE PROPOSED AMENDMENT THEREFORE, SEEKS TO PROVIDE THAT AN ELIGIBLE TRANSACTION CARRIED OUT IN RESPECT OF TRADING IN DERIVATIVES IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . THE PROPOSED AMENDMENT ALSO SEEKS TO NOTIFY RELEVANT RULES ETC. REGARDING CONDITIONS TO BE FULFILLED BY RECOGNIZED EXCHANGES IN THIS REGARD. FURTHER IT IS ALSO PROPOSED TO AMEND SUB-S. (4) OF S.73 SO AS TO REDUCE THE PERIOD OF CARRY FOR WARD OF SPECULATION LOSSES FROM EIGHT ASSESSMENT YEARS TO FOUR ASSESSMENT YEARS. THESE AMENDMENTS WILL TAKE EFFECT FROM 1ST APRIL 20 06 AND WILL, ACCORDINGLY, APPLY IN RELATION TO ASST. YEARS 2006- 07 AND SUBSEQUENT YEARS .' FROM THE ABOVE IT IS EVIDENT THAT THE ELIGIBLE TRAN SACTIONS IN DERIVATIVES CARRIED OUT THROUGH RECOGNIZED STOCK EXCHANGES ARE EXEMPTED FROM THE PURVIEW OF BEING SPECULATIVE TRANSACTIONS BY VIRTUE OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH EXPLANATION PROVIDED OTHER CONDITIONS ARE SATISFIED BECAUSE OF RECENT AND SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCED BY ST OCK EXCHANGES WHICH ARE IN-FACT ANTI EVASION MEASURES TO PREVENT GENERATING FICTITIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. IT IS ALSO PERTINENT TO NOTE THAT IN DERIVATIVES, T HE TRANSACTION IS ALWAYS SETTLED OR SQUARED OTHERWISE THAN BY ACTUAL DELIVERY OR TRA NSFER OF THE COMMODITY OR SCRIPS. THUS, THE LAW-MAKERS GRANTED THE EXEMPTIONS TO SPEC IFIED DERIVATIVES TRADING FROM BEING CLASSIFIED AS SPECULATIVE TRANSA CTION PROVIDED THEY MEET ALL THE STIPULATED CONDITIONS U/S 43(5) OF THE ACT, BY INTRODUCTION OF PROVISO (D) TO ITA 778/MUM/2014 11 SECTION 43(5) BY FINANCE ACT,2005 W.E.F. 01-04-2006 WHICH IS APPLICABLE FROM ASSESSMENT YEAR 2006-07 AND SUBSEQUENT ASSESSMENT Y EARS , AND THIS WAS DONE BY THE PARLIAMENT KEEPING IN VIEW THE RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCED BY STOCK MARKETS WHICH HAVE RESU LTED IN SUFFICIENT TRANSPARENCY TO PREVENT GENERATING FICTITIOUS LOSSE S THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. THE SCREEN BASED COMPUTERIZED TRADING PROVIDES FOR AN E XCELLENT AUDIT TRAIL. THEREFORE, THE PRESENT DISTINCTION BETWEEN SPECULAT IVE AND NON-SPECULATIVE TRANSACTIONS, PARTICULARLY RELATING TO DERIVATIVES IS NO MORE REQUIRED. THUS, WHEN THE HONBLE FINANCE MINISTER INTRODUCED THE AF ORE-STATED PROPOSED AMENDMENT VIDE FINANCE BILL, 2005 IN PARLIAMENT WHI CH IS INTRODUCED ON 28 TH FEBRUARY 2005 , THE CENTRAL GOVERNMENT WAS FULLY A WARE THAT NOW STOCK EXCHANGES IN INDIA ARE TECHNICALLY EQUIPPED TO PREV ENT MANIPULATIONS IN THE MARKETS, AND DERIVATIVE TRANSACTIONS WHICH COMPLIES WITH ALL THE STIPULATED PRESCRIBED REQUIREMENTS ARE TO BE TAKEN OUT OF BEI NG TREATED AS SPECULATIVE TRANSACTION AND HENCE AMENDMENTS WERE PROPOSED FROM APRIL 1, 2006 I.E. W.E.F. ASSESSMENT YEAR 2006-07 AND SUBSEQUENT ASSESSMENT Y EARS ONWARDS , WHICH IS ABSOLUTELY CLEAR AND CORROBORATED FROM THE LANGUAGE USED IN MEMORANDUM WHILE INTRODUCING THE PROPOSED AMENDMENTS VIDE FINA NCE BILL, 2005, WHICH READS AS UNDER: RECENT SYSTEMIC AND TECHNOLOGICAL CHANGES INTRODUCE D BY STOCK MARKETS HAVE RESULTED IN SUFFICIENT TRANSPARENCY TO PREVENT GENERATING FICTITIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS OR SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. THE SCREEN BASED COMPUTERIZE D TRADING PROVIDES FOR AN EXCELLENT AUDIT TRAIL. THEREFORE, THE PRESEN T DISTINCTION BETWEEN SPECULATIVE AND NON- SPECULATIVE TRANSACTIONS, PART ICULARLY RELATING TO DERIVATIVES IS NO MORE REQUIRED. ITA 778/MUM/2014 12 THUS, UNDER THESE CIRCUMSTANCES RECOGNITION TO NSE/ BSE FOR THE PURPOSES OF PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH E XPLANATION AND NOTIFICATION THEREOF BY CENTRAL GOVERNMENT WAS A MERE PROCEDURAL REQUIRE MENT TO BE COMPLIED WITH AS THE TECHNICAL AND SYSTEMIC CHANGES WERE ALREADY INT RODUCED BY THESE TWO STOCK EXCHANGES WHICH HAVE RESULTED IN SUFFICIENT TRANSPA RENCY TO PREVENT GENERATING FICTITIOUS LOSSES THROUGH ARTIFICIAL TRANSACTIONS O R SHIFTING OF INCIDENCE OF LOSS FROM ONE PERSON TO ANOTHER. THE SCREEN BASED COMPUTERIZE D TRADING PROVIDED FOR AN EXCELLENT AUDIT TRAIL. THIS WAS WITHIN THE KNOWLEDG E OF CENTRAL GOVERNMENT WHEN THE PROPOSED AMENDMENTS WERE INTRODUCED IN PARLIAME NT VIDE FINANCE BILL , 2005 ON 28 TH FEBRUARY 2005. THUS, IT CANNOT BE PRESUMED THAT WH EN THE PARLIAMENT APPROVED THE PROPOSED AMENDMENTS VIDE FINANCE BILL , 2005 IT WAS NOT AWARE OF THE TECHNOLOGICAL AND SYSTEMIC CHANGES INTRODUCED BY ST OCK EXCHANGES TO PREVENT MANIPULATIONS IN STOCK MARKET AS SET OUT IN MEMORAN DUM TO THE FINANCE BILL, 2005. THE NSE/BSE WERE FINALLY NOTIFIED BY CENTRAL GOVERNMENT AS RECOGNIZED STOCK EXCHANGES W.E.F. 25-01-2006 (SO 899E) , DATED 25-01-2006, BUT IT WAS RATHER MERELY A PROCEDURAL REQUIREMENT AS THESE STOCK EXCH ANGES WERE OTHERWISE TECHNOLOGICALLY EQUIPPED TO BE GRANTED RECOGNITION WHEN THE FINANCE BILL,2005 WAS ITSELF INTRODUCED BY THE HONBLE FINANCE MINISTER I N THE PARLIAMENT ON 28-02-2005 AS CULLED OUT FROM THE LANGUAGE USED IN MEMORANDUM TO FINANCE BILL, 2005 AND HENCE THE LOSSES INCURRED IN DERIVATIVE TRANSACTION S WHICH OTHERWISE COMPLIES WITH ALL THE REQUIREMENTS STIPULATED IN THE PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH EXPLANATION FROM THE BEGINNING OF RELEVANT PREVIOUS YEAR I.E. 01-04-2005 SHALL BE ALLOWABLE AS NON-SPECULATIVE LOSSES AND ARE TO B E TREATED AS COVERED BY EXCLUSION CLAUSE SET OUT IN PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH E XPLANATION DESPITE THE FACT THAT NSE/BSE WERE RECOGNIZED ON 25-01-2006 . THE SAID AMENDMENT IN STATUTE WAS BROUGHT BY FINANCE ACT, 2005 W.E.F 01-0 4-2006 AND IS APPLICABLE FOR ASSESSMENT YEAR 2006-07 AND SUBSEQUENT YEARS . IT WAS HELD BY THE HONBLE GUJARAT HIGH COURT IN CASE OF CLARIS LIFESCIENCES L IMITED V. ACIT(2008) 112 ITD 307 (GUJ HC) THAT ONCE THE APPROVAL IS GRANTED IN THE R ELEVANT PREVIOUS YEAR , AND IN THE ABSENCE OF ANYTHING INDICATED TO THE CONTRARY, THE APPROVAL HAS TO BE TAKEN AS ITA 778/MUM/2014 13 EFFECTIVE FROM THE BEGINNING OF THE RELEVANT YEAR. THE MUMBAI TRIBUNAL IN THE CASE OF PREM ASSOCIATES ADVERTISING AND MARKETING V. JCI T IN ITA 6547/MUM/2009 VIDE ORDERS DATED 17-09-2010 HAS ALLOWED THE LOSSES INCU RRED IN DERIVATIVE TRANSACTIONS DURING PREVIOUS YEAR 2005-06 BUT PRIOR TO 25-01-200 6 TO BE TREATED AS COVERED BY THE EXCLUSION CLAUSE SET OUT IN THE PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT , BY HOLDING AS UNDER: 7. WE FIND THAT IT IS UNDISPUTED POSITION THAT TH E STOCK EXCHANGES, ON WHICH THE IMPUGNED TRANSACTIONS WERE CARRIED OUT , WERE D ULY NOTIFIED ON 25 TH JANUARY 2006, AND THAT IN ACCORDANCE WITH THE VIEWS OF THE CO-ORDINATE BENCH IN THE CASE OF ANAND BUILDWELL(SUPRA), AS ALSO WITH THE VIEWS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFESCIENC ES(SUPRA), ONCE THE APPROVAL IS GRANTED IN THE RELEVANT PREVIOUS YEAR, AND IN TH E ABSENCE OF ANYTHING INDICATED TO THE CONTRARY , THE APPROVAL HAS TO BE TAKEN AS EFFECTIVE FROM THE BEGINNING OF THE RELEVANT YEAR. THE ISSUE IS THUS C OVERED, IN FAVOUR OF THE LINE OF REASONING ADOPTED BY THE ASSESSEE, BY DECISION OF T HE COORDINATE BENCH IN THE CASE OF ANAND BROTHERS(SUPRA) AND BY HONBLE GUJARA T HIGH COURTS JUDGMENT IN THE CASE OF CLARIS LIFESCIENCES(SUPRA). RESPECTF ULLY FOLLOWING THESE DECISIONS, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND HOLD TH AT THE DERIVATIVE TRANSACTIONS ENTERED INTO BY THE ASSESSEE AT THE RE COGNIZED STOCK EXCHANGES EVEN PRIOR TO THE DATE OF NOTIFICATION IN THE RELEV ANT PREVIOUS YEAR, ARE TO BE TREATED AS COVERED BY THE EXCLUSION CLAUSE SET OUT IN SECTION 43(5)(D). THE ASSESSEE GETS RELIEF ACCORDINGLY. IT WAS HELD BY THE TRIBUNAL IN OTHER CASES AS CITED BY THE LEARNED COUNSEL OF THE ASSESSEE AS DETAILED ABOVE IN PRECEDING PARAS THAT LOSSES INCURRED PRIOR TO ISSUE OF NOTIFICATION ON 25 TH JANUARY, 2006 BUT DURING THE RELEVANT PREVIOUS YEA R 2005-06 SHALL BE TREATED AS NON-SPECULATIVE NORMAL BUSINESS LOSSES PROVIDED IT SATISFIES OTHER CONDITIONS AS STIPULATED VIDE PROVISO (D) TO CLAUSE (5) OF SECTION 43 OF THE ACT READ WITH EXPLANATION. IN OUR CONSIDERED VIEW, THE LOSSES INCURRED BY THE ASSESSEE I.E. RS. 20,83,591/- WHICH ARE STATED TO BE INCURR ED DURING PREVIOUS YEAR 2005-06 ITA 778/MUM/2014 14 BUT PRIOR TO 25 TH JANUARY, 2006 I.E. THE DATE WHEN NSE/BSE WERE REC OGNISED BY CENTRAL GOVERNMENT VIDE NOTIFICATION ISSUED BY CENT RAL GOVERNMENT ON 25-01-2006, BUT WITHIN THE PREVIOUS YEAR 2005-06 WHICH WAS RELE VANT TO THE ASSESSMENT YEAR 2006-07 SHOULD BE TREATED AS NORMAL NON-SPECULATIVE BUSINESS LOSSES AND ARE TO BE TREATED AS COVERED BY THE EXCLUSION CLAUSE SET OUT IN PROVISO (D) TO CLAUSE (5) OF SECTION 43 READ WITH EXPLANATION AND ALLOWED TO BE CARRIED FORWARD AS NON- SPECULATIVE BUSINESS LOSSES TO SET OFF AGAINST THE NORMAL BUSINESS INCOME OF THE INSTANT PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YE AR IN QUESTION, AS LAID DOWN IN THE RATIO OF THE DECISIONS OF THE TRIBUNAL CITED BE FORE US AS SET OUT ABOVE AND ALSO AS PER OUR DETAILED DISCUSSIONS IN PRECEDING PARAS OF THIS ORDER, HENCE WE ALLOW THE APPEAL FILED BY THE ASSESSEE ON THIS GROUND. IT IS PERTINENT TO MENTION HERE THAT TRUE NATURE AND CHARACTER OF THE PAST LOSSES SUFFERED BY THE ASSESSEE IN THE ASSESSMENT YEAR 2006-07 WHICH ARE TO BE SET OFF IN THE IMPUGNE D ASSESSMENT YEAR 2009-10 , IT IS OPEN TO BE DECIDED IN THE IMPUGNED ASSESSMENT YE AR WHICH RATIO OF LAW IS SUPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH C OURT IN THE CASE OF WESTERN INDIA OIL DISTRIBUTING CO. LIMITED V. CIT (1980) 12 6 ITR 497(BOM.) WHICH WAS AFFIRMED BY HONBLE SUPREME COURT IN CIT V. WESTERN INDIA OIL DISTRIBUTING COMPANY LIMITED REPORTED IN (2001) 249 ITR 517(SC). THIS PROPOSITION OF LAW WAS ALSO FOLLOWED IN ONE OF CASES CITED BY LEARNED COUN SEL OF THE ASSESSEE , DECIDED BY THE MUMBAI TRIBUNAL IN GAJENDRA KUMAR T. AGARWAL V. ITO REPORTED IN (2011) 11 ITR (TRIB.) 640(MUMBAI). THIS DISPOSES OF GROUND NO 2 RAISED BY THE ASSESSEE IN MEMO OF APPEAL FILED WITH THE TRIBUNAL WHICH IS ADJ UDICATED BY ALLOWING THIS GROUND OF APPEAL RAISED BY THE ASSESSEE AS INDICATED ABOVE . WE ORDER ACCORDINGLY. ITA 778/MUM/2014 15 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA N0. 778/MUM/2014 FOR THE ASSESSMENT YEAR 2009-10 IS PARTLY ALLOWED AS IN DICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY , 2016. # $% &' 29-07-2016 SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 29-07-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. => 99?@ , ?@ , $ / DR, ITAT, MUMBAI D BENCH 6. BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI