Case Law Details
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.
Contention of the Assessee:
The assessee was not satisfied as the assessing officer treated the loss as speculation loss and did not allow set off of loss from derivative trading against profit from other activities..
The details of profits earned and the losses incurred are as follows:
Profit from dealing in shares (delivery based) 4, 59,450
Profit from dealing in shares (non delivery based) 1, 56,378
Profit from Trading in Commodity Futures 74, 72,122
Loss from Trading in Shares Futures 95, 06,474
The fact that the loss of Rs. 95,06, 474/- has been incurred on derivatives (share futures) is undisputed. Also the fact that there is a profit of Rs. 74, 72,122/- on account of trading in commodity futures is undisputed. The only question is the allowability of the same as business profit/loss as seen from the provision of section 43(5) of the Act:
Contention of Revenue:
The Assessing Officer was not satisfied with the assessee’s submissions. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee had filed complete details and contract notes of the transactions done in derivative and commodity future before the AO as well as before him and that the action of the AO was contrary to the provision of section 43(5) clause (c) and (d) of the Act.
The ld. CIT(A) held that the AO was not justified in treating the transactions of derivative trading and commodity future as speculative, he directed the AO to allow the set off of loss incurred from derivative trading against the profit earned from commodity future, sale & purchase of shares and commission earned on sale & purchase of land.
It was further submitted that the speculative transaction is defined in section 43(5) of the Act to means a transaction in which contract for purchase or sale of any commodity, including stock & shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity
Held by ITAT:
After hearing the rival contentions, in the present case, it is an admitted fact that the assessee suffered a business loss in shares amounting to Rs. 11 95, 06,474/- on derivatives which was treated by the AO as speculative in nature. The assessee also earned profit of Rs. 74, 72,122/- on account of trading in commodity futures. The said profit was also considered by the AO as speculative in nature but without bringing any material on record as to how the same was speculative in nature. The assessee earned the profit relating to delivery based share trading, trading in commodities and earning commission on booking of flats. Profit earned from those activities by the assessee cannot be considered as speculative in nature.
In the present case, it is an admitted fact that the assessee was engaged in the business of dealing in shares & securities and has incurred loss from dealing in derivatives (shares futures). It is not the case of the AO that the share futures in which the assessee was dealing were not recorded in recognized Stock Exchange, the loss incurred by the assessee was also not disputed by the AO. We, therefore, by keeping in view the provisions contained in clause (d) to Subsection (5) of Section 43 of the Act, are of the view that the ld. CIT(A) was fully justified in directing the AO for not treating the loss incurred by the assessee on derivatives and the profit earned if trading of the commodity as speculative in nature.
Analysed by our Team Member Shruti Juneja
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