BOMBAY HIGH COURT
The Commissioner of Income-tax Vs. Shri Bharat R. Ruia (HUF) Phoenix Mills Premises (Decided on 18.04.2011)
Direct Taxation - Speculation loss - Assessee (HUF), engaged in the business of trading in shares and securities, entered into certain derivative transactions which resulted in loss - Assessee claimed said loss as business loss - Assessing Officer (AO) rejected said contention of the assessee and held that the loss incurred was speculation loss covered under Section 43(5) of the Income Tax Act, 1961
(a) Whether the transactions in exchange traded financial derivatives were 'speculative transactions' as defined in Section 43(5) of the Act, 1961?
Held, Section 43(5) of the Act provides that a transaction for purchase/sale of any commodity would be a speculative transaction if it was settled otherwise than by actual delivery - For the purposes of Section 43(5) of the Act, it was not necessary that the commodity agreed to be purchased or sold must be capable of actual delivery - In the instant case, the assessee had entered into futures contracts for purchase of shares of certain companies at a specified future date and at a specified price, which were to be settled in cash without actual delivery of the shares - Future contracts for 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 Section 43(5) of the Act - Hence, the exchange traded derivative transactions carried on by the assessee during Assessment Year 2003-04 were speculative transactions covered under Section 43(5) of the Act
(b) Whether clause (d) inserted to the proviso to Section 43(5) of the Act w.e.f. 1.4.2006 would apply to such transactions undertaken in the Assessment year 2003-04
Held, firstly, the legislature by Finance Act, 1995 had specifically provided that clause (d) to the proviso to Section 43(5) of the Act shall come into operation prospectively w.e.f. 1.4.2006 - Secondly, insertion of clause (d) was not necessitated on account of the fact that the provisions of Section 43(5) of the Act were unworkable - Thirdly, even after insertion of clause (d) in Section 43(5) of the Act, all transactions in derivatives were not taken outside the purview of Section 43(5) of the Act - It was only those derivative transactions which were covered under clause (d) were taken outside the purview of Section 43(5) of the Act and the rest of the transactions in derivatives would continue to be covered under Section 43(5) of the Act - Hence, contention of assessee that clause (d) inserted to the proviso to Section 43(5) of the Act had retrospective effect could not be accepted - Clause (d) inserted to the proviso to Section 43(5) of the Act w.e.f. 1.4.2006 was prospective in nature and could not apply to transactions undertaken in the Assessment Year 2003-04- Impugned order of the Tribunal set aside - Revenue's appeal allowed.
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