The assessee, an HUF is engaged in the business of trading in shares and securities, etc. In AY 2003–2004, the assessee entered into “exchange traded derivatives” which resulted in a loss of Rs. 28 lakhs which was claimed as a business loss. The AO disallowed the loss, holding that the loss incurred was speculation loss covered under s 43(5). The findings of the AO were upheld by the CIT(A). However, the Tribunal allowed the appeal of the assessee, holding that clause (d) to the proviso to s 43(5) of the Act being retrospective in nature, the losses incurred from the derivative transactions could not be treated as speculation losses incurred by the assessee in AY 2003–2004. Being aggrieved, the revenue has filed the present appeal.
The issue is whether the loss incurred from the derivative transactions carried on through a recognised stock exchange during the year 2003–2004 would constitute loss from speculative transaction as contemplated under s 43(5) and whether clause (d) inserted to the proviso to s 43(5) of the Act w.e.f. 1 April 2006 would apply to such transactions undertaken in the AY 2003–2004.
Section 43(5) defines the expression “speculative transaction” to mean a transaction in 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 delivery or transfer of the commodity or scrips. The expression “commodity” is not defined under the Act and has to be given meaning as understood in the common parlance, ie an article of trade or commerce which is tangible in nature. As the futures contracts are articles of trade and commerce which are legally permitted to be traded on the stock exchange, the transactions in futures would be transactions in a commodity as contemplated under s 43(5).
The transactions in futures are made legal and valid even if the underlying securities permitted to be purchased/sold under the futures contracts are not tangible and incapable of actual delivery, provided such transactions are traded on a recognised stock exchange and settled on the clearing house of a recognised stock exchange. Moreover, s 43(5) provides that a transaction for the purchase/sale of any commodity would be a speculative transaction if it is settled otherwise than by actual delivery. Therefore, future contracts for the purchase/sale of an underlying security permitted to be traded on the stock exchange and settled otherwise than by actual delivery would be speculative transactions under s 43(5).
The argument that the expression “commodity” does not include “stocks and shares”, however, for the purposes of s 43(5), the expression “commodity” has been expanded to include “stocks and shares” and since transactions in derivatives are not specifically included in s 43(5), the same would fall outside the purview of s 43(5) is rejected. Section 43(5) does not seek to expand the scope of the expression “commodity” but merely emphasises that the transaction in commodity includes transactions in stocks and shares. Therefore, transactions in futures contracts like transactions in stocks and shares when settled otherwise than by actual delivery would be speculative transactions under s 43(5).
The argument that s 43(5) refers to contracts which are capable of settlement by actual delivery whereas the transactions in futures are incapable of settlement and therefore, transactions in futures fall outside the scope of s 43(5) is not acceptable because the very object of s 43(5) is to treat transactions which are settled otherwise than by actual delivery as speculative transactions.
The argument that clause (d) to the proviso to s 43(5) inserted by the FA 1995 w.e.f 1 April 2006 is clarificatory and retrospective is not acceptable because it is specifically provided that clause (d) to the proviso to s 43(5) shall come into operation prospectively w.e.f. 1 April 2006, the insertion of clause (d) was not necessitated on account of the fact that the s 43(5) was unworkable or its interpretation resulted in unintended consequences, even after the insertion of clause (d), all transactions in derivatives are not taken outside the purview of s 43(5). It is only those derivative transactions which are covered under clause (d) that are taken outside the purview of s 43(5) and the rest of the transactions in derivatives continue to be covered by s 43(5).
Loss incurred from the transactions in exchange traded financial derivatives is “Speculation” Loss under s 43(5). Clause (d) inserted to the proviso to s 43(5) is not retrospective — as held by MumHC in CIT v Bharat R. Ruia (HUF) — In favour of: The Revenue; Income Tax Appeal No. 1539 of 2010
Decided on: 18 April 2011
The issue is whether the loss incurred from the derivative transactions carried on through a recognised stock exchange during the year 2003–2004 would constitute loss from speculative transaction as contemplated under s 43(5) and whether clause (d) inserted to the proviso to s 43(5) of the Act w.e.f. 1 April 2006 would apply to such transactions undertaken in the AY 2003–2004.
Section 43(5) defines the expression “speculative transaction” to mean a transaction in 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 delivery or transfer of the commodity or scrips. The expression “commodity” is not defined under the Act and has to be given meaning as understood in the common parlance, ie an article of trade or commerce which is tangible in nature. As the futures contracts are articles of trade and commerce which are legally permitted to be traded on the stock exchange, the transactions in futures would be transactions in a commodity as contemplated under s 43(5).
The transactions in futures are made legal and valid even if the underlying securities permitted to be purchased/sold under the futures contracts are not tangible and incapable of actual delivery, provided such transactions are traded on a recognised stock exchange and settled on the clearing house of a recognised stock exchange. Moreover, s 43(5) provides that a transaction for the purchase/sale of any commodity would be a speculative transaction if it is settled otherwise than by actual delivery. Therefore, future contracts for the purchase/sale of an underlying security permitted to be traded on the stock exchange and settled otherwise than by actual delivery would be speculative transactions under s 43(5).
The argument that the expression “commodity” does not include “stocks and shares”, however, for the purposes of s 43(5), the expression “commodity” has been expanded to include “stocks and shares” and since transactions in derivatives are not specifically included in s 43(5), the same would fall outside the purview of s 43(5) is rejected. Section 43(5) does not seek to expand the scope of the expression “commodity” but merely emphasises that the transaction in commodity includes transactions in stocks and shares. Therefore, transactions in futures contracts like transactions in stocks and shares when settled otherwise than by actual delivery would be speculative transactions under s 43(5).
The argument that s 43(5) refers to contracts which are capable of settlement by actual delivery whereas the transactions in futures are incapable of settlement and therefore, transactions in futures fall outside the scope of s 43(5) is not acceptable because the very object of s 43(5) is to treat transactions which are settled otherwise than by actual delivery as speculative transactions.
The argument that clause (d) to the proviso to s 43(5) inserted by the FA 1995 w.e.f 1 April 2006 is clarificatory and retrospective is not acceptable because it is specifically provided that clause (d) to the proviso to s 43(5) shall come into operation prospectively w.e.f. 1 April 2006, the insertion of clause (d) was not necessitated on account of the fact that the s 43(5) was unworkable or its interpretation resulted in unintended consequences, even after the insertion of clause (d), all transactions in derivatives are not taken outside the purview of s 43(5). It is only those derivative transactions which are covered under clause (d) that are taken outside the purview of s 43(5) and the rest of the transactions in derivatives continue to be covered by s 43(5).
Loss incurred from the transactions in exchange traded financial derivatives is “Speculation” Loss under s 43(5). Clause (d) inserted to the proviso to s 43(5) is not retrospective — as held by MumHC in CIT v Bharat R. Ruia (HUF) — In favour of: The Revenue; Income Tax Appeal No. 1539 of 2010
Decided on: 18 April 2011
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