SB rules income from derivative trading in shares prior to financial year 2005-06 is speculation income

By TG Team Income Tax Articles , Judiciary December 31, 2009

TaxGuru Citation: 2009 taxguru.in 532
Case Name: Shree Capital Services Ltd. Vs. ACIT (ITAT Kolkata)
Appeal Number: Only available for paid members
Courts: ITAT Kolkata

This Article summarizes a recent ruling of the Special Bench (SB) of Kolkata Income Tax Appellate Tribunal (ITAT) in the case of Shree Capital Services Ltd. (Taxpayer) vs. ACIT (ITA No. 1294 (Kol) of 2008) in which the SB held that, prior to financial year 2005-06 (assessment year 2006-07), derivative transactions in shares were covered by the definition of speculative transactions (ST). The SB further held that the exception to the definition of ST, from tax year 2005-06, in respect of eligible derivative transactions carried out on recognized stock exchanges, is not clarificatory in nature and does not have a retrospective effect for earlier years.

Background and Facts

Section 43(5)(Section) of the Indian Tax Law (ITL) defines ST as ‘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’. Under the ITL, the characterization of a transaction as ST is relevant, as loss from such transactions is not permitted to be set off against any other income (including regular business income). Further, the period of carry forward for such losses is restricted to 4 years instead of the normal period of 8 years.

Up to tax year 2004-05, the Section carved out an exception for certain specified hedging contracts from the scope of ST.

From tax year 2005-06, a further exception was added to the definition in terms of which, eligible derivative transactions on recognized stock exchanges, which fulfill certain conditions, are also excluded from the scope of ST.

The Taxpayer is engaged in the business of financing and investments in shares and securities. In the tax year 200304 (i.e. prior to the amendment from tax year 2005-06), it suffered loss on account of derivative transactions, in respect of shares of companies.

The Tax Authority treated the derivative transactions as ST and denied set off of such loss. The first appellate authority confirmed the decision of the Tax Authority. The Taxpayer further appealed to the ITAT. The Division Bench of the ITAT referred the issue to the SB of the ITAT.

Contentions of the Taxpayer