IN THE ITAT MUMBAI BENCH ‘A’
Assistant Commissioner of Income-tax, Circle-16(1)
Arnav Akshay Mehta
IT APPEAL NO. 2742 (MUM.) OF 2011
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 12, 2012
Amit Shukla, Judicial Member
The present appeal preferred by the Revenue, is directed against the impugned order dated 31st January 2011, passed by the learned Commissioner (Appeals)-XXVIII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short “the Act”), for assessment year 2007-08.
2. The sole ground raised in this appeal relates to loss incurred on derivative trading of Rs. 77,63,237, as speculation loss by the Assessing Officer and thereby disallowing the set-off as business loss. The assessee is an individual and is engaged in the business of derivative trading in commodity and investment in shares. During the year under appeal, the assessee had shown business loss of Rs. 77,63,237 from derivative trading, short term capital gains of Rs. 92,08,889, and long term capital loss of Rs. 32,46,619. Besides this, the assessee had income from other sources at Rs. 3,83,383. In the course of assessment proceedings, the Assessing Officer observed that the assessee has incurred loss in derivative trading in commodity of Rs. 77,63,237, as normal business loss and has sought set-off against short term capital gains and income from other sources. He further observed that in view of the clause (d) to section 43(5) of the Act, which was brought in the statute w.e.f. 1st April 2006, had excluded only those derivative transactions from its ambit which were carried out in a recognized stock exchange. In response to the show cause notice, as to why loss in derivative trading should not be treated as speculation loss, the assessee replied as under:-
a. Derivative transactions are treated as business income / loss particularly so when they are part of regular business transaction.
b. Dealings in derivatives being a separate kind of transaction don’t involve purchase and sale of shares and therefore loss on account of derivative trading cannot be speculation loss. Reliance was placed on the decision of Mumbai Bench of the ITAT in the case of DCIT v. SSKI Investors Services P. Ltd. (113 TTJ 511) and RB Securities Pvt. Ltd. v. ITO.
c. Derivative transactions are non speculative and it is not necessary that the exchanges have to be notified.”
3. The Assessing Officer rejected the said contentions on the ground that the judgment relied upon by the assessee was rendered for the assessment year 2001-02, which becomes inapplicable from the assessment year 2006-07, because of specific insertion of clause (d) in section 43(5), wherein those derivative transactions have been excluded from the purview of speculative transactions which are eligible and are carried on at a recognized Stock Exchange. The assessee’s transaction on derivative trading in commodity in MCX were not recognized in the stock exchange in accordance with the provisions of section 43(5) r/w Rule-6DDA, 6DDB of the I.T. Rules, and Notification no.SQ 89(E). He further held that MCX in which the assessee was carrying on its derivative trading has been notified as recognized Stock Exchange for the purpose of section 43(5) only by Notification no.46/2009 dated 22nd May 2009, with prospective effect. Therefore, the assessee’s derivative trading in MCX has a speculation business in the assessment year 2007-08.
4. The assessee, aggrieved by the stand so taken by the Assessing Officer, went in appeal before the first appellate authority, wherein, the assessee contended that the derivative transaction carried out by the assessee are part of the business and, hence, the loss incurred should be treated as non-speculative business loss and the definition of speculation transaction under section 43(5), do not include derivative, leave alone the commodity derivative. Further, it was submitted that the amendment brought w.e.f. 1st April 2006, in clause (d) of the proviso to sub-section (5) of section 43, specifically provided that eligible transactions in trading derivative carried out in recognized Stock Exchange shall not be deemed to be speculative transaction even though the trading in MCX has been notified as recognized exchange for the purpose of section 43(5) from 22nd May 2009. Since the same being clarificatory in nature, therefore, the same has to be construed retrospectively from the assessment year 2006-07. Lastly, it was submitted that the derivative is a financial instrument and, therefore, it is not a speculation transactions in a strict sense in terms of section 43(5). In support of this contention, the assessee relied upon the decision of the Tribunal, Jaipur Bench, in P.S. Kapoor v. ACIT, reported in 29 SOT 587, and the Tribunal, Chennai Bench decision in DCIT v. Paterson Securities P. Ltd. reported in 127 ITD 386.
5. The Commissioner (Appeals) agreed with the contentions of the assessee and after relying upon the decision cited by the assessee, held that the claim of loss in derivative trading is to be allowed as set-off from business income. Accordingly, the assessee’s ground was allowed. Aggrieved, the Revenue is in appeal before the Tribunal.
6. Before us, the learned Departmental Representative relied on the order passed by the Assessing Officer and submitted that the trading in MCX have been notified as recognized Stock Exchange for the purpose of section 43(5) only from 22nd May 2009, with prospective effect and the same will not be applicable in the assessee’s case which is for the assessment year 2007-08. He submitted that even though the amendment in section has come from assessment year 2006-07, however, the Board has notified the MCX only in the year 2009, therefore, the derivative trading in MCX cannot be held to be non-speculative business income in this year (i.e., A.Y. 2007–08) and the Assessing Officer has rightly treated as speculation business. The reasons given by the Commissioner (Appeals) in allowing the appeal by following the decision of Chennai Bench that trading in derivative cannot be considered as speculative loss is incorrect. Otherwise there was no requirement for bringing a specific clause (d) in proviso to section 43(5).
7. On the other hand, the learned Counsel for the assessee submitted that clause (d) of proviso to section 43(5), which is applicable from 1st April 2006, is prospective in nature and will be applicable to the assessment year 2006-07 onwards as held by Kolkata Special Bench of the Tribunal in Shree Capital Services Ltd. v. ACIT, reported in 121 ITD 498 (SB) (Cal.). The notification dated 22nd May 2009, is by way of subordinated legislation which cannot override the principal legislation enacted by the Parliament. It only clarifies the mandate of statute and will not override the statutory provisions. Since there is no dispute to the fact that the transaction in the assessee’s case in future and option segment were the eligible transaction carried out in a recognized Stock Exchange i.e., MCX, the loss in such transactions could not be termed to be loss in speculation business. In support of his contention, he relied upon the following judicial pronouncements:-
1. ACIT v. Hiren Jashwantrai Shah 12 taxmann.com 55 (Ahd.), 46 SOT 276;
2. Smt. Seema Jain v. ACIT 49 SOT 30;
3. Pradeep Kumar Harlalka v. ACIT 47 SOT 204;
4. ACIT v. Parimal D. Nathwani 9 taxmann.com 284
5. G.K. Anand Bros Buildwell P. Ltd. v. ITO 34 SOT 439 (Del.)
8. We have carefully considered the rival contentions of the parties, perused the findings of the Commissioner (Appeals) as well as of the Assessing Officer and the material available on record. The assessee who is carrying out derivative trading in commodity through MCX Stock Exchange has incurred a loss of Rs. 77,63,237. The Assessing Officer has treated such as a loss as speculation loss mainly on the ground that Notification number 46 of 2009, issued by the CBDT, on 22nd May 2009, recognizing MCX as recognized Stock Exchange for the purpose of section 43(5), only from the said date and has prospective effect and, therefore, such a derivative trading in commodity through MCX prior to the said date will amount to speculation business. By Finance Act, 2005, clause (d) was inserted in the proviso to sub-section (5) of section 43 w.e.f. 1st April 2006, which provided that an “eligible transaction in respect of trading in derivative referred to in clause (a) of section (2) of Securities Contract (Regulation) Act, 1956, carried out in a recognized Stock Exchange” shall not be deemed to be speculative transactions. Thus, from 1st April 2006, trading in derivative carried through the recognized Stock Exchange was treated as non-speculative transactions. For the purpose of clause (d), Rule 6DDA and 6DDB of I.T. Rules, 1962, provided that notification of recognized Stock Exchange has to be done by the Central Govt. (CBDT). In pursuance to this Rule, the CBDT has notified the MCX Stock Exchange Ltd. by S.O. 1327(E) dated 22nd May 2009.
9. Now, the issue is whether such a notification given on 22nd May 2009, thorugh which MCX Stock Exchange has been recognized, can be held to be applicable for the transaction undertaken in the assessment year 2007-08 i.e., after 1st April 2006. From the combined reading of clause (d) of proviso to section 43(5), Rule 6DDA, 6DDB and Explanation (ii) to section 43(5), it would be seen that the rules which has been prescribed are only procedural in nature, as it prescribes the method as to how to apply for necessary recognition and consequent notification. Hence, these are purely procedural mechanism. When a rule or provision does not effect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective unless such an inference is likely to lead to an absurdity. If the amendment is made in procedural mechanism, it will apply to all the proceedings pending or to be initiated. Once in the statute, it has been provided that w.e.f. 1st April 2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculation transaction, then simply because procedural mechanism has taken a long time to recognize the Stock Exchange, it will not lead to an inference that the same would be applicable from the date when the Stock Exchange has been recognized by the Central Govt. The notification issued under Rule 6DDB, does not empower any right or create obligation but only recognizes what is already provided in statute. Thus, the transactions carried out through MCX Stock Exchange after 1st April 2006, would be eligible for being treated as non-speculation within the meaning of clause (d) of proviso to section 43(5). Various case laws, as have been relied upon by the learned Counsel also, support this view that recognition by the Central Govt. of the Stock Exchange from a later date will not debar the transaction as non-speculation, especially after 1st April 2006. Therefore, in our opinion, the assessee’s derivative trading through MCX Stock Exchange in the assessment year 2007-08 is non-speculation transaction and, therefore, the loss incurred in such transactions is to be treated as normal business loss and, accordingly, the findings of the Commissioner (Appeals), to this extent, is upheld. Accordingly, the ground raised by the Revenue is dismissed.
10. In the result, Revenue’s appeal is dismissed.
We now take up the assessee’s Cross Objection no.124/Mum./2011, arising out of the appeal preferred by the Revenue. The grounds raised are as follows:-
1. The cross objector prays that derivative transactions are business transactions and cannot be treated as speculative transaction with effect from 1st April 2005.
2. The cross objector prays Rule 6DDB is only procedural in nature and hence it is deemed to be retrospective unless such inference is likely to lead to absurdity.
3. The cross objector prays that the power to notify the stock exchange is granted under the statute and hence once the stock exchange is notified the same will apply in respect of all the transactions carried out in relation to financial year relevant to assessment year 2006-07 onwards even if the notification is from a particular date.”
11. After haring both the parties we find that the grounds raised in this cross objection are in support of the contention raised before the authorities below. Since we have dismissed the appeal preferred by the Revenue, the grounds raised in the cross objection thus becomes infructuous. Consequently, the same are being dismissed as infructuous.
12. In the result, assessee’s cross objection is dismissed.
13. To sum up, Revenue’s appeal as well as assessee’s cross objection are dismissed.