Is Loss from derivative trading is a speculation loss & can it be set-off against normal business profits

Brief Facts of the Case and Question of law

Brief Facts: The assessee filed Nil return of income after adjusting brought forward losses and paying tax u/s 115JB of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 24.10.2007, which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee was dealing in shares & securities, earning commission on the booking of flats and from commodity trading. The AO asked the assessee to explain as to why Explanation (5) to section 73 of IT Act should not be made.

The AO observed that the assessee had incurred loss in derivative trading of Rs. 90, 74,051/- and earned profit on commodity future transaction of Rs. 71, 83,701/-. He further observed that the assessee was also doing delivery based sales/purchase, earning commission on sale of flats and under this head the assessee had shown profit of Rs. 21,15,903/-. The AO treated the transactions of derivative trading and commodity trading as speculative in nature, therefore, the loss on derivative trading of Rs. 90, 74,051/- was allowed to be set off to the extent of commodity profit of Rs. 71, 83,701/- and the balance loss of Rs. 18, 90,350/- was treated as speculative loss which was allowed to be carried forward and set off against speculative profit.

Question Raised:

Can the transactions related to sale purchase of shares and derivatives/commodity trading are speculative transactions and consequently allowed to be set-off of losses incurred from derivative trading against profit earned from other activities.

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