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Derivative transaction through MCX after 1-4-2006 to be treated as non-

speculative
Posted In Income Tax Case Laws | Featured, Judiciary | 1 Comment
IN THE ITAT MUMBAI BENCH A
Assistant Commissioner of Income-tax, Circle-16(1)
v/s.
Arnav Akshay Mehta
IT APPEAL NO. 2742 (MUM.) OF 2011
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 12, 2012
ORDER
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 dont 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 assessees 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 assessees 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 assessees 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 assessees 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. 200708) 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 assessees 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 assessees 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, Revenues appeal is dismissed.
We now take up the assessees 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, assessees cross objection is dismissed.
13. To sum up, Revenues appeal as well as assessees cross objection are dismissed.
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Despite Section 43(5) Exemption, Derivatives Loss Is Speculation Loss For
Companies
Posted In Income Tax Case Laws | Judiciary | No Comments
Issue- Did the Income Tax Appellate Tribunal (ITAT) fall into error in not holding that the loss of
Rs. 4,92,71,000/- on account of derivative transaction was a speculative loss, and was entitled to the
benefit of Section 73, in view of the Explanation to Section 73 of the Income Tax Act
Brief Facts :- The brief facts are that the assessee claimed loss of Rs.492.71 lakhs on account of
purchase and sale of shares. The assessee argued that the loss in trading of derivatives was not a
speculative loss in terms of Section 43(5) of the Income Tax Act and could not be disallowed as
speculative loss under any provisions of the Income Tax Act. The Assessing Officer rejected that
submission and held that Section 73 applied since it was independent of Section 43(5). Explanation to
Section 73 can be applied even if there is delivery based sale purchase of shares and also in
situations of trading of derivatives. It was held that the assessee was not engaged in any of the
specifically excluded categories of business as to render Explanation to Section 73 inapplicable. The
AO held that loss of Rs.492.71 lakhs had to be treated as speculative loss and could not be allowed
to be adjusted against business income. The CIT (Appeals) rejected the assessees contentions.
Therefore, a further appeal was preferred to the ITAT, which accepted the contention that Explanation
to Section 73 applied, and granted the relief claimed. The revenue is in appeal against that part of the
impugned order of the Tribunal.
Held :- It is no doubt, tempting to hold that since the expression derivatives is defined only in
Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and
further that since that has not been excluded from Section 73, yet, the Court would be doing violence
to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or
objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the
statute. Thus contextual application of a definition or term is stressed; wherever the context and
setting of a provision indicates an intention that an expression defined in some other place in the
enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms
(such as unless the context otherwise requires) are used.
The stated objective of Section 73- apparent from the tenor of its language is to deny speculative
businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to
clarify beyond any shadow of doubt that share business of certain types or classes of companies are
deemed to be speculative. That in another part of the statute, which deals with computation of
business income, derivatives are excluded from the definition of speculative transactions, only
underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the
Madras High Courts expression,

derivatives are assets, whose values are derived from values of


underlying assets

; in the present case, by all accounts the derivatives are based on stocks and
shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that
derivatives do not fall within that provision, when the underlying asset itself does not qualify for the
benefit, as they (derivatives once removed from it and entirely dependent on stocks and shares, for
determination of their value).
In the light of the above discussion, it is held that the Tribunal erred in law in holding that the
assessee was entitled to carry forward its losses; the question framed is answered in favour of the
revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to
costs.
IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 06.05.2013 Pronounced on: 11.07.2013
ITA 94/2013
THE COMMISSIONER OF INCOME TAX DELHI-IV
Versus
DLF COMMERCIAL DEVELOPERS LIMITED
CORAM:
HONBLE MR. JUSTICE S. RAVINDRA BHAT HONBLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S.RAVINDRA BHAT
1. This appeal of the revenue impugns an order of the Income Tax Appellate Tribunal (ITAT)
dated 30.11.2011 in the assessees appeal [ITA No. 1446 (Del) of 2011] whereby its contention about
inapplicability of Explanation to Section 73 of the Income Tax Act, 1961 in respect of its transactions,
and the resulting relief in carry forward of its losses for the previous year, in respect of its derivative
business was upheld. This Court framed the following question of law for consideration, and heard the
parties, i.e:

Did the Income Tax Appellate Tribunal (ITAT) fall into error in not holding that the loss of
Rs. 4,92,71,000/- on account of derivative transaction was a speculative loss, and was entitled to the
benefit of Section 73, in view of the Explanation to Section 73 of the Income Tax Act;
2. The brief facts are that the assessee claimed loss of Rs.492.71 lakhs on account of purchase and
sale of shares. The assessee argued that the loss in trading of derivatives was not a speculative loss
in terms of Section 43(5) of the Income Tax Act and could not be disallowed as speculative loss under
any provisions of the Income Tax Act. The Assessing Officer rejected that submission and held that
Section 73 applied since it was independent of Section 43(5). Explanation to Section 73 can be
applied even if there is delivery based sale purchase of shares and also in situations of trading of
derivatives. It was held that the assessee was not engaged in any of the specifically excluded
categories of business as to render Explanation to Section 73 inapplicable. The AO held that loss of
Rs.492.71 lakhs had to be treated as speculative loss and could not be allowed to be adjusted against
business income. The CIT (Appeals) rejected the assessees contentions. Therefore, a further appeal
was preferred to the ITAT, which accepted the contention that Explanation to Section 73 applied, and
granted the relief claimed. The revenue is in appeal against that part of the impugned order of the
Tribunal.
3. Learned counsel for the Revenue argued that the reliance placed upon an amended Section 43 (4)
of the Income Tax Act by the impugned order is erroneous. It is highlighted in this regard that the
scheme and structure of Section 73 is clear. Counsel argued that explanation to the provision
categorically provides that where any part of the business of the company includes purchase and sale
of shares of other company, it shall be deemed to be carrying on speculation business to the extent to
which the business consists of that activity. The intention of Section 43, counsel submitted, was to
define certain terms in respect of classification of income and for purposes of Sections 28-41. Section
43(5) stated that transactions where 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, it would not be deemed to be speculative transaction. By the amendment
made w.e.f. 01 .04.2006, four categories of contracts including the one provided under Section
43(5)(d) i.e. transaction in respect of trading and derivative as defined under Securities Contract
(Regulation) Act, 1956 are not to be deemed to be speculative transaction. However, counsel drew
strength from the fact that the said provision, i.e., Section 43(5)(d) has restricted application in that it
defines speculative transaction and excludes transactions and derivatives only for a limited purpose.
On the other hand, Section 73 has wider application and relates to all manner of losses. It deals with
a question of under what circumstances can carry forwarding of such losses be permitted. Learned
counsel for the Revenue relied upon the decisions reported as CIT v. Intermetal Trade Ltd., 2006
(285) ITR 536 (M.P.); CIT v. Arvind Investments Ltd., 1991 (192) ITR 365 (Cal) and Eastern Aviation
and Industries Ltd. v. CIT, 1994 (208) ITR 1023. In this regard, it is submitted that the specific
inclusion of the activity of sale and purchase of share of other companies from the otherwise general
application of principles underlying Section 73 meant that those transactions could not claim the
benefit of the provision. Derivatives of the kind and nature traded by the assessee in the present case
were relatable to stocks and shares and what is more were the subject matter of transactions under
the National Stock Exchange. In these circumstances, the Tribunal ought not to have permitted the
assessee the benefit of Section 73.
4. Learned counsel for the Revenue submitted that there is no infirmity with the judgment and order of
the Tribunal impugned in the present case. He highlighted the fact that the trade and transactions in
derivatives as defined under Section 2 of the Securities Contract (Regulation) Act, 1956, were
specifically excluded from the definition of speculative transactions. Even though that definition was in
Section 43(5), yet neither the Tribunal nor the Court could ignore it since there was no other definition
of derivatives in the Income Tax Act. Counsel sought to highlight that derivative need not be only in
respect of stocks and shares but could also pertained to commodities. Such being the case, the
Tribunal acted within its jurisdiction and correctly concluded that the assessee could enjoy the benefit
of Section 73 and did not fall within the mischief of its explanation.
5. Counsel submitted that the decision of the Madras High Court in Rajshree Sugars and Chemicals
Ltd. v. Axis Bank Ltd., AIR 2011 Mad 144 in support of the submission that derivatives depend on
underlying assets which are not confined to stocks and shares but can be commodities, metals,
energy resources, bonds and foreign currencies etc. Assessees counsel also relied upon the decision
of the Division of the Bombay High Court reported as CIT v. Bharat R. Ruia (HUF), 2011 (337) ITR
452 (Bom) where especially the discussion relating to the amended position had taken place. The
Bombay High Court had considered the pre-amended position and held that derivatives in the light of
the then existing position under Section 45 (5) were speculative transactions but the position had
changed after 01.04.2006 in view of the clarification by way of the amendment.
6. Before a discussion on the merits of the appeal, it would be essential to extract the relevant
provisions of the Income Tax Act. Section 73 (with explanation), to the extent it is relevant, reads as
follows:

Losses in speculation business.


73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not
be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not
been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss
where the assessee had no income from any other speculation business, shall, subject to the other
provisions of this Chapter, be carried forward to the following assessment year, and
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by
him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to
the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research,
the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they
apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than [four] assessment years
immediately succeeding the assessment year for which the loss was first computed.
[Explanation.Where any part of the business of a company [other than a company whose gross
total income consists mainly of income which is chargeable under the heads "Interest on securities",
"Income from house property", "Capital gains" and "Income from other sources"], or a company the
principal business of which is the business of banking or the granting of loans and advances) consists
in the purchase and sale of shares of other companies, such company shall, for the purposes of this
section, be deemed to be carrying on a speculation business to the extent to which the business
consists of the purchase and sale of such shares.]
Section 43, to the extent it is relevant, reads as follows:
43. In Sections 28 to 41 and in this section, unless the context otherwise requires-
********** *********
(5)

Speculative transaction

means a transaction in which a contract for the purchase of 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:
Provided that for the purposes of this clause
(a) A contract in respect of raw materials or merchandise entered into by a person in the course of his
manufacturing or merchanting business to guard against loss through future price fluctuations in
respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him;
or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard
against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any
transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary
course of his business as such member (or)
(d) An eligible transaction in respect of trading in derivatives referred to in clause {(ac)} of section 2 of
the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock
exchange;]
Shall not be deemed to be a speculative transaction,
[Explanation Four the purpose of this clause, the expressions
(i)

eligible transaction

means any transaction -


(A)Carried out electronically on screen-based systems through a stock broker or sub-broker or such
other intermediary registered under section 12 of the Securities and exchange Board of India Act,
1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act,
1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 or the Depositories Act,
1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts
or by banks or mutual funds on a recognized stock exchange; ;and
(B)which is supported by a time stamped contract note issued by such stock broker or sub-broker or
such other intermediary to every client indicating in the contract note the unique client identity number
allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this
Act;
(ii)
"
recognized stock exchange" means a recognized stock exchange as referred to in clause (f) of
section 2 of the Securities Contracts (Regulation) act, 1956 (42 of 1956) and which fulfils such
conditions as may be prescribed and notified by the Central Government for this purpose;]
7. It is apparent, facially, that the term speculative transaction has been defined only in Section 43
(5). At the same time, it is qualified, i.e. that the scope of the definition is restricted in its application to
working out the mandate of Sections 28 to 41 of the Act. In terms of the Explanation to Section 73 (4)
in the case of a company, business of purchase and sale of shares is deemed to be speculation
business. However, certain companies are excluded from this Explanation which are:
(i) a company whose gross total income consists mainly of income which is chargeable under the
heads Interest on securities, Income from house property, Capital gains and Income from other
sources.
(ii) a company, the principal business of which is the business of banking or the granting of loans
and advances.
8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall
in Chapter IV, in Section D, which deal with computation of business income. The said provisions
provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs
of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure
on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax,
etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be
found in Section 43 (5); yet the Court cannot ignore or overlook that the definition to the extent it
excludes such transactions from the mischief of the expression speculative transactions is confined
in its application. Parliamentary intendment that such transactions are also excluded from the mischief
of Explanation to Section 73 (4), however, is not borne out.
9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd
(supra), the Madras High Court noticed, rather dramatically, that .. Derivatives are time bombs and
financial weapons of mass destruction said Warren Buffett, one of the worlds greatest investors, who
overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the
Sage of Omaha or Oracle of Omaha. Derivatives, according to him, can push companies on to a
spiral that can lead to a corporate melt down.

The High Court then, after examining the nature and


characteristics of derivatives transactions, observed that:

5. What are these derivatives which have gained such a great deal of notoriety? In simple terms,
derivatives are financial instruments whose values depend on the value of other underlying financial
instruments. The International Accounting Standard (IAS) 39, defines derivatives as follows:
A derivative is a financial instrument:
(a) whose value changes in response to the change in a specified interest rate, security
price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index,
or similar variable (sometimes called the underlying);
(b) that requires no initial net investment or little initial net investment relative to other types of
contracts that have a similar response to changes in market conditions; and
(c) that is settled at a future date.
Actually, derivatives are assets, whose values are derived from values of underlying assets. These
underlying assets can be commodities, metals, energy resources, and financial assets such as
shares, bonds, and foreign currencies.


10. It is no doubt, tempting to hold that since the expression derivatives is defined only in Section 43
(5) and since it excludes such transactions from the odium of speculative transactions, and further
that since that has not been excluded from Section 73, yet, the Court would be doing violence to
Parliamentary intendment. This is because a definition enacted for only a restricted purpose or
objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the
statute. Thus contextual application of a definition or term is stressed; wherever the context and
setting of a provision indicates an intention that an expression defined in some other place in the
enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms
(such as unless the context otherwise requires) are used. In The Vanguard Fire & General
Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr AIR 1960 SC 971 it was held that:

It is well settled that all statutory definitions or abbreviations must be read subject to the qualification
variously expressed in the definition clauses which created them and it may be that even where the
definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for
the word to have a somewhat different meaning in different sections of the Act depending upon the
subject or the context. That is why all definitions in statutes generally begin with the qualifying words
similar to the words used in the present case, namely, unless there is anything repugnant in the
subject or context. Therefore in finding out the meaning of the word insurer in various sections of
the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not
inflexible and there may be sections in the Act where the meaning may have to be departed from on
account of the subject or context in which the word has been used and that will be giving effect to the
opening sentence in the definition section, namely, unless there is anything repugnant in the subject
or context. In view of this qualification, the court has not only to look at the words but also to look at
the context, the collocation and the object of such words relating to such matter and interpret the
meaning intended to be conveyed by the use of the words under the circumstances.


Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that:

4. The subject matter and the context in which a particular word is used are of great importance and it
is axiomatic that the object underlying the Act must always be kept in view in construing the context
in which a particular word is used.
11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative
businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to
clarify beyond any shadow of doubt that share business of certain types or classes of companies are
deemed to be speculative. That in another part of the statute, which deals with computation of
business income, derivatives are excluded from the definition of speculative transactions, only
underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the
Madras High Courts expression,

derivatives are assets, whose values are derived from values of


underlying assets

; in the present case, by all accounts the derivatives are based on stocks and
shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that
derivatives do not fall within that provision, when the underlying asset itself does not qualify for the
benefit, as they (derivatives once removed from it and entirely dependent on stocks and shares, for
determination of their value).
12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the
assessee was entitled to carry forward its losses; the question framed is answered in favour of the
revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to
costs.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
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speculation-loss-companies.html#sthash.2OyIf intention for trade in share is earning
quick Profit by frequent trading, such profit taxable as business income
Posted In Income Tax Case Laws | Judiciary | No Comments
ITAT RAJKOT BENCH
Deputy Commissioner of Income-tax
Versus
Mukeshbhai Babulal Shah
IT Appeal No. 318 (Rajkot) of 2011
[ASSESSMENT YEAR 2008-09]
FEBRUARY 8, 2013
ORDER
D.K. Srivastava, Accountant Member
The appeal filed by the Revenue is directed against the order passed by the CIT(A) on 14-06-2011,
on the following grounds:-
1. The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs.86,87,101/- made by
the AO, treating the income disclosed under the head Short Term Capital Gain as Business income,
without properly appreciating the facts of the case and the materials brought on record by the AO.
2. The Ld. CIT(A) erred in law and on facts in directing to treat where the holding of the shares
is for a period of less than one month, the purchase and sale of shares is to be treated as business of
the assessee, and where the period of holding of the shares is more than one month, the purchase of
shares is to be treated as investment of the assessee, according to the period of holding of such
shares.
3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order
of the Assessing Officer.
4. It is therefore prayed that the order of the Ld. CIT(A) may be set aside and that of the order
of the Assessing Officer be restored to the above extent.
2. The assessee is an individual. He filed his return of income for the assessment year under appeal
on 16-07-2008 returning total income at Rs. 96,75,150/-. Perusal of the Tax Audit Report filed by the
assessee for the assessment year under appeal shows that he is engaged in the business of trading
of shares and in no other business. Trading of shares is his full time activity and source of income
in respect of which he has maintained, as per Tax Audit Report, various books of accounts, namely,
ledger, bank book, cash book, purchase register, ales register and journal. It is also stated in the Tax
Audit Report that the tax auditor has examined the aforesaid books of account before giving his Tax
Audit Report stating that the assessee is engaged in the business of trading of shares. During the
course of assessment proceedings, the AO noticed that the assessee has shown income from his
business at Rs. 10,69,519/-; income from short term capital gain at Rs. 86,87,102/- and income from
other sources at Rs. 18,452/-. On further scrutiny of his accounts, the Assessing Officer noticed that
profits from transactions on account of trading in Future and Options have been shown as business
income while profits from transactions in respect of shares purchased and sold on delivery basis have
been shown as capital gain. The Assessing Officer called upon the assessee to justify his claim that
as to how the income on account of purchase and sale of shares on delivery basis was in the nature
of capital gain and not in the nature of business income u/s.28 of the Income-tax Act. After taking into
account the submissions of the assessee, the Assessing Officer concluded that the profits from
purchase and sale of shares on delivery basis were in the nature of business income and not in the
nature of capital gains as claimed by the assessee. In this view of the matter, he taxed a sum of
Rs.86,86,102/- shown by the assessee as short term capital gain as income from business u/s 28 of
the Income-tax Act for the reasons given by the AO in Para 4 of the assessment order.
3. On appeal, the ld. CIT(A) accepted the claim of the assessee that the impugned profits from
purchase and sale of shares were in the nature of short term capital gain as claimed by the assessee
and not in the nature of business income as held by the Assessing Officer following the judgment of
this Tribunal in Sugamchand C. Shah v. Asstt. CIT [2011] 48 SOT 189 (URO) with the following
observations:-
2.11 However, the controversy relating to the taxability of the transactions of purchase and sale of
shares and securities and the treatment to be given to such transactions has been resolved and set at
rest by the Honble Ahmedabad Tribunal in the case of Sugamchand C. Shah v. ACIT 37 DTR (Ahd)
(Trib.) 345. The Honble Ahmedabad Tribunal has held in the aforesaid case that:
Considering the totality and peculiarity of the facts of this case, we find that assessee is neither fully
acting as a trader nor as fully investor. Demarcation is quite hazy, though in the books he is showing
all the purchases as investment but frequency of transaction in several cases is so large and holding
period in many cases is so small form 0 to a week or so that assessee is de facto selling and
purchasing shares as trader. He is also holding shares for long period-indicating that they are held as
investment. Therefore, a criteria has to be fixed for determining as to when he is acting as trader and
when as investor. Accordingly, we decide following criteria to hold when gains are to be taxed as
profit to be earned under business or to be treated as short term capital gain, we hold that if shares
are not held even say for a month, then the intention is clearly to reap profit by acting as trader and he
did not intend to hold them in investment portfolio. We believe that if a person intends to hold his
purchases of shares as investment, he would watch the fluctuation of rates in the market for which a
minimum time is necessary, which we estimate at one month. Where shares are held for more than a
month, they should be treated as investments and on their sale short term capital gain should be
charged. When shares are held for less than a month, gain on them should be treated as profit from
business.
2.12 Considering the aforesaid discussion in para-2.2 to para-2.7 and specifically following the
aforesaid binding decision of the Honble Ahmedabad Tribunal in the case of Sugamchand C. Shah, it
is held that where the holding of the shares is for a period of less than one month, the purchase and
sale of shares is to be treated as business of the assessee and the resultant profit/loss is subject to
tax as business income/loss. However, where the period of holding of the shares is more than one
month, the purchases of shares is to be treated as investment and the assessee will be subjected to
tax on short term capital gain or long term capital gain on the sales thereof according to the period of
holding of such shares. The Assessing Officer is directed to re-calculate the business income or the
short term capital gains as the case may be on the basis of period of holding of share as held by the
Honble jurisdictional Tribunal in the case of Sugamchand C. Shah (supra).
4. Aggrieved by the aforesaid order passed by the CIT(A), the Revenue is now in appeal before this
Tribunal. In support of appeal, the ld. Departmental Representative invited our attention to the factual
aspects of the case. Referring to the Tax Audit Report filed by the assessee for the year under appeal
in which the nature of business of the assessee has been shown as TRADING OF SHARES, he
submitted that the assessee was a mere trader in shares and therefore his entire income from trading
of shares was assessable as trading/business income u/s 28 of the Income-tax Act. His next
submission was that the assessee himself has shown profits from trading of shares as gross profit in
his account duly audited by tax auditors and therefore the aforesaid treatment given by the assessee
to the income arising from purchase and sale of shares was nothing but his business income. His
third submission was that the assessee has bifurcated his dealing in purchase and sale of shares
under two heads, namely, (1) Future and Options, and (2) purchase and sale of shares based on
delivery in his books of account. His fourth submission was that the stock turnover ratio of the
assessee was 1:16 while gross profit rate was 5%. He further submitted that the capital turnover ratio
was 1:14 and dividend as percentage of average capital was 0.01%. On the basis of the aforesaid
facts, he contended that the assessee was not an investor but a dealer in shares. According to him,
the frequency to turnover, volume of turnover and the intention of the assessee to realize the profit
quickly were sufficient to establish that the assessee was not an investor in shares but a trader in
shares. He submitted that the aforesaid facts fully confirmed the observations of the tax auditor that
the assessee was mere a trader of shares and not investor in shares.
5. He also referred to several judgments particularly those referred to by the AO in his assessment
order. He, in particular, referred to the decision of this Tribunal in Wallfort Financial Services
Ltd. v. Addl. CIT [2010] 41 SOT 200.
6. In reply, the ld. Authorized Representative for the assessee supported the order passed by the
CIT(A). He filed two sets of written submissions till the date of hearing and third set of written
submissions was sent by him by post after the closure of hearing on 21-01-2013. His submissions, in
brief, are as under:-
i. The Books of Accounts shows the purchase and sell as the investment and that shows that
the appellant is engaged in the investment activity.
ii. Appellant has made investments from his own funds and not from the borrowed funds.
iii. The motive of the appellant was capital appreciation and not to make instant profit.
iv. The appellant has no infrastructure or administrative set up and that shows that the activity
in which the appellant is engaged is purely an investment activity. All the decisions and actions were
taken by appellant himself.
v. The appellant is maintaining two portfolios and which is well accepted now as per the
decision in the case of Gopal Purohit v. JCIT. (Supra).
vi. In the previous years, the similar treatment was given and the same has been accepted by
the Ld. DCIT.
vii. All other small issues like period of holding, frequency etc. are also covered by few of the
decision narrated here in above.
7. He has also relied upon several judgments most of which have been referred to by the CIT(A) in his
appellate order.
8. In his rejoinder, the ld. Departmental Representative referred to the observations made by the
CIT(A) in para-2.7 of his appellate order in which it is stated that the assessee was consistently
maintaining two portfolios, one relating to investment in shares and another relating to business
activities and submitted that the aforesaid findings recorded by the CIT(A) were factually incorrect
inasmuch as no such accounts were maintained by the assessee in his books. According to him, the
assessee has bifurcated his activity into two sets of transactions, one relating to future and options
and the other relating to profits from shares based on delivery. He also referred to paras-2.8 and 2.9
of the appellate order passed by the CIT(A) and submitted that the ld. CIT(A) has wrongly held that (i)
there was no transaction without delivery, (ii) the assessee has used his own surplus funds for
investing in shares, and (iii) the assessee has received substantial dividend on the investments. He
submitted that all the aforesaid findings recorded by the CIT(A) in para-2.9 of his appellate order were
factually incorrect.
9. We have heard both the parties and carefully considered their submissions as also the materials
available on record. Section 28 of the Income-tax Act brings the profits and gains of any business or
profession carried on by the assessee at any time during the previous year to the charge of income
tax. Sub-section (13) of section 2 defines business as including any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is
therefore quite evident that the subject matter of charge u/s.28 is not only the profit from any trade,
commerce or manufacture but also profit from any adventure or concern in the nature of trade,
commerce or manufacture. The subject matter of charge u/s.45 of the Income-tax Act, on the other
hand, is capital gains, i.e., any profit or gain arising from the transfer of capital receipt effected in the
previous year. Capital asset is defined in sub-section (14) of section 2 as property of any kind held by
assessee, whether or not connected with his business or profession, but does not include, inter-alia,
any stock-in-trade. The distinction between income from business assessable u/s 28 and income from
capital gain assessable under section 45 of the Income-tax Act has been explained by a Bench of five
Judges of the Honble Supreme Court in Sardar Indra Singh & Sons Ltd. v. CIT [1953] 24 ITR 415 as
under:-
The principle applicable in all such cases is well settled and the question always is whether the sales
which produced the surplus were so connected with the carrying on of the assessees business that it
could fairly be said that the surplus is the profits and gains of such business. It is not necessary that
the surplus should have resulted from such a course of dealing in securities as by itself would amount
to the carrying on of a business of buying and selling securities. It would be enough if such sales were
effected in the usual course of carrying on the business or, in the words used by the Privy Council in
Punjab Co-operative Bank Ltd. v. Income-tax Commissioner, Lahore, if the realization of securities is
a normal step in carrying on the assessees business. Though that case arose out of the assessment
of a banking business, the test is one of general application in determining whether the surplus arising
out of such transactions is a capital receipt or a trading profit. The question is primarily one of fact and
there are numerous cases falling on either side of the line but illustrating the same principle. On the
facts found in regard to the nature and course of the companys business, there can be no doubt that
the present case falls on the Revenues side of the line.
10. In G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594, the Honble Supreme Court has held
as under:-
As we have already observed it is impossible to evolve any formula which can be applied in
determining the character of isolated transactions which come before the courts in tax proceedings. It
would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally
speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature
of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land
intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear
case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of
realization of investments consisting of purchase and resale, though profitable, are clearly outside the
domain of adventures in the nature of trade. In deciding the character of such transactions several
factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity
and its resale allied to his usual trade or business or incidental to it? Affirmative answers to these
questions may furnish relevant data for determining the character of the transaction. What is the
nature of the commodity purchased and resold and in what quantity was it purchased and resold? If
the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large
quantities, it would tend to eliminate the possibility of investment for personal use, possession or
enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the
commodity purchased and thereby made it more readily resaleable? What were the incidents
associated with the purchase and resale? Were they similar to the operations usually associated with
trade or business? Are the transactions of purchase and sale repeated? In regard to the purchase of
the commodity and its subsequent possession by the purchaser, does the element of pride of
possession come into the picture? A person may purchase a piece of art, hold it for some time and if
a profitable offer is received may sell it. During the time that the purchaser had its possession he may
be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that
would be a factor against the contention that the transaction is in the nature of trade. These and other
considerations are set out and discussed in judicial decisions which deal with the character of
transactions alleged to be in the nature of trade. In considering these decisions it would be necessary
to remember that they do not purport to lay down any general or universal test. The presence of all
the relevant circumstances mentioned in any of them may help the court to draw a similar inference;
but it is not a matter of merely counting the number of facts and circumstances pro and con; what is
important to consider is their distinctive character. In each case, it is the total effect of all relevant
factors and circumstances that determines the character of the transaction; and so, though we may
attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce
any rule from them and mechanically apply it to the facts before us.
11. In H. Mohmed & Co. v. CIT [1977] 107 ITR 637 (Guj.) the Honble jurisdictional High Court has
held as under: -
These two illustrations of the circulating library and the car-hiring business clearly go to
show the essential characteristics of stock-in-trade, viz., that it must be a commodity in which there is
a dealing, i.e; which is bought and sold as distinguished from a commodity with which the business is
carried on, viz., from the exploitation of which the income is derived. The distinction is between selling
outright in the course of the business activity as distinguished from deriving income from exploitation
of ones assets.
12. The aforesaid decisions make it amply clear that the income from purchase and sale of shares
would be assessed as business income if the intention of the assessee behind their purchase and
sale is to quickly realize profits. However, if the intention of the assessee behind purchasing and
holding the shares is to earn dividend and not to realize the profit by turning over the shares as it is
done in the course of business, the profit arising on sale of shares would be assessable as capital
gains u/s 45 of the Income-tax Act. This aspect of the matter has been considered by this Tribunal in
its well- reasoned order in Wallfort Financial Services Ltd. (supra) as under:-
2.23 Though frequency and volume are indicative of a trading transaction, the same are not
conclusive. The volume will depend upon funds deployed by the assessee and therefore the same
could be high even in case of investment. Frequency is also not conclusive because even an investor
may be frequently buying and selling shares and still he may remain an investor because the shares
he is buying he may not be selling during the year and the shares sold may be those purchased more
than a year ago. Therefore even if the number of transactions is large and volume is high, the
assessee may still be an investor. Crucial factor is the period of holding which will be very short in
case of a trader and long in case of an investor because a trader buys the commodity not for holding
it in contrast to an investor who buys the commodity for holding it so as to earn some income from
investment and have decent appreciation. In case of shares, income is in the form of annual dividend
and therefore an investor in shares will normally be holding shares for more than a year and any sale
before one year has to be explained from the circumstances of the case. The profit motive is also
relevant but this is also not conclusive because even an investor may earn profit by way of
appreciation.
13. Turning to the facts of the case, the stock-turnover ratio, as rightly pointed out by the ld.
Departmental Representative, is as high as 1:16. Such high stock-turnover ratio is found in business
segment and not in investment segment. This shows that the intention of the assessee was to turn
over the stock as frequently as possible to ensure quick realization of profits on sale of shares. In the
Tax Audit Report, the nature of the business of the assessee has been shown as trading of shares.
The tax auditor has come to the aforesaid conclusion after due examination of the books of account.
The assessee has no other business. He is fully engaged in dealing with shares. He himself has
treated the profit from purchase and sale of shares as gross profit in his books of account. The
capital-turnover ratio, as pointed by ld. Departmental Representative, is as high as 1:14 which is
normally found in business and not in investment. This shows that the intention of the assessee was
to optimally utilize his capital to secure large turnover of shares as in the case of business. The fact
that the shares were not held as a source of revenue is evident from the fact that dividend as
percentage of average capital works out to 0.05%. Neither in the books of account nor otherwise the
assessee has proceeded to compute the income from purchase and sale of shares in the manner laid
down u/s 48 of the Income-tax Act. He has simply treated the entire profit arising on purchase and
sale of shares as gross profit in the books of account. It is further observed that the assessee has
utilized its own funds for trading not only in futures and options but also in purchase and sale of
shares. All these facts clearly indicate that the dominant intention of the assessee behind purchase
and sale of shares was to quickly realize profits by frequently tuning over the stock of shares and not
to earn dividend from them. The aforesaid indicators lend credent to the fact that the assessee treated
the shares more as stock-in-trade than as a capital asset. On the facts of the case, we endorse the
view taken by the AO that the income arising from purchase and sale of shares is in the nature of
business income as defined u/s 28 r.w.s. 2(13) of the Income-tax Act. In this view of the matter, the
order passed by the AO deserves to be confirmed and is accordingly confirmed.
14. The ld. Authorized Representative for the assessee has cited a large number of decisions in
support of the order passed by the CIT(A). We have perused all of them. They are distinguishable on
facts. The finding as to whether a particular income has arisen from trading activity or investment is
essentially a finding of fact as held by the Honble Bombay High court in CIT v. Gopal Purohit [2011]
336 ITR 287 and by the Honble Supreme Court in Sardar Indra Singh & Sons Ltd. (supra). The facts
in the case before us are completely different from those in the decisions cited by the assessee. In
our view, the principles laid down by this Tribunal in Wallfort Financial Services Ltd. (supra). re in
conformity with the judgments of the Honble Supreme Court and High Court some of which have
been referred to above.
15. It was also contended on behalf of the assessee that the assessee is not a broker engaged in
dealing with shares and therefore the income arising from purchase and sale of shares cannot be
assessed in his hand as dealer/trader in shares. We are unable to accept the aforesaid submission. A
broker in shares/securities in one who brokers a deal between purchaser and seller of
shares/securities and in that process gets his brokerage. He does not himself purchase or sell the
shares in his own right. A dealer/trader, on the other hand, purchases and sells the shares in his own
right in order to quickly realize the profits for which purpose he frequently turns over the stock.
Therefore, the mere fact that the assessee is not a broker in shares does not mean that he is also not
a dealer/trader in shares.
16. In view of the aforesaid, the appeal filed by the Department is allowed.
Related Post
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How to Compute Turnover In Case of Future &
Options, Speculation for Tax Audit
Posted In Income Tax | Articles | 10 Comments
Query I AM engaged in the buying and selling of shares. I take delivery of the shares purchased and
also deliver the shares at the time of sale. In such a case, how is the turnover to be reckoned for the
purpose of determining whether a tax audit under Section 44AB is to be done? Is it the aggregate
amount of sale that has to be taken as the turnover?Reply
In the instant case, since the purchase and sale of shares are delivery based, the gross sale value
has to be taken as the turnover. Therefore, if the gross sale value exceeds Rs 100 lakh, a chartered
accountant must conduct a tax audit under Section 44AB. It is understood that you are a regular
trader in shares carrying on the business of buying and selling of shares.
Query
I am engaged in buying and selling of shares. I do not take delivery of the shares and these
transactions are speculative in nature. What is to be taken as the turnover for the purpose of
determining whether a tax audit is required in such cases? Are short-term and long-term capital gains
to be taxed under the same head? Is a speculative business also to be taxed under the head capital
gains? Can expenditure, such as depreciation on assets such as computer, air-conditioner, furniture
and postage, telephone, conveyance, and so on, be claimed against speculative income? Can a
business loss be set off against salary income?
Reply
In this case, since the transactions in shares are non-delivery based, it is only the net of the sales and
purchases that is to be treated as turnover. Tax audit under Section 44AB would be required only if
the turnover so computed exceeds Rs 100 lakh. You may refer to the decision of the Mumbai Bench
of the Tribunal in the Babu Lal Enterprises vs ACIT (ITA NO.6031/MUM/1996) case as also the ruling
in the Royal Cushion Vinyl Products Ltd case.
Both short-term and long-term capital gains are to be taxed under the head `capital gains. Any profits
and gains from a speculative transaction is to be taxed under the head `profits and gains of business
or profession. In case of speculative transaction, all expenditure allowable under Sections 30 to 38
can be claimed since the charge arises under the head `profits and gains of business or profession.
You can claim expenses, such as postage, conveyance and telephone, incurred by you for carrying
on the business. You can also claim depreciation on assets used for the business or profession. You
may, however, note that a loss, if any, from a speculation business cannot be set off against income
from other sources or other heads. It can only be set off against speculation income and the balance,
if any, after such set off, can be carried forward and set off against speculation income within four
assessment years immediately succeeding the assessment year in which the loss was first computed.
In case of business loss not being a speculative loss, it can be set off against income from other
sources or other heads. It cannot, however, be set off against income under the head `salaries. The
balance, if any, can be carried forward and set off against business income within eight assessment
years immediately succeeding the assessment year in which the loss was first computed.
Unabsorbed depreciation can, however, be set off and carried forward and set off without any
restriction either in the manner of set off or the timeframe for such set off.
Query
In case of `options and `futures, is the gain or loss to be treated as speculation loss?
Reply
The gain or loss from dealing in `options and `futures will not be treated as a speculation loss. This
will be so because of the provisions of Section 43(5) of the Act.
Under section 43(5) of the Income Tax Act, 1961 an eligible transaction in respect of trading in
derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956
(42 of 1956) carried out in a recognised stock exchange will not be treated as speculative transaction
despite not been settled by actual delivery.
1. Eligible transaction in respect of Section 43(5) means any transaction:-
a) carried out electronically on screen-based systems through a stock broker or sub-broker or such
other intermediary registered under section 12 of the Securities and Exchange Board of India Act,
1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act,
1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the
Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued
under those Acts or by banks or mutual funds on a recognised stock exchange; and
b)which is supported by a time stamped contract note issued by such stock broker or sub-broker or
such other intermediary to every client indicating in the contract note the unique client identity number
allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this
Act;
2. recognised stock exchange means a recognised stock exchange as referred to in clause (f) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such
conditions as may be prescribed and notified by the Central Government for this purpose;]
Query
How is turnover in Futures and options transactions calculated?? If notional value is considered, even
5-10 transactions will exceed 100L turnover and we need go through tedious Tax audit process.
Reply
The meaning of turnover for in case of transactions in Futures and Options of shares is not defined
under the I T Act In case of derivative trading-Futures and Option- the difference on which the
contract is purchased or sold is important. Although the value of contract is number of contract
multiplied with the shares price , yet what is actually given or taken is differential amount in contract.
For example if you purchase a future contract for Rs 105 for a share having a lot of 100,you pay
nothing at the time of buying a contract, yet at the time of expiry if contract , you are either gainer or
loser which is determined whether there is positive or negative difference. So , for the purpose of
determining the turnover in case of future and options , for the purpose of 44AB , based on the
guidance note of ICAI , following items should be considered to constitute turnover:-
o The total of positive and negative differences , plus
o Premium received on sale of options is also to be included in turnover ,plus
o In respect of any reverse trades entered, the difference thereon But not the total value of contract.
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1961.html#sthash.7c8IJbft.dpuf
Computation of turnover for speculative
transactions, derivative transactions,
futures and options

POSTED BY ALOK PATNIA ON MAY 24TH, 2011

Today the capital market has assumed a very significant place in our country involving
speculative transactions, derivative transactions, futures and options. Speculative
transaction are the financial transaction involving speculative risk where the eventual
net return or final cost is not known in advance. Derivatives are also powerful risk
management tools or a financial instrument whose characteristics and value depends
upon the characteristics and value of an underlier typically a commodity, bond, equity
or currency. Futures and Options are also types of derivatives.
According to Section 43(5) of the Income Tax Act, 1961 (the Act) speculation
transaction means 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. Following
derivatives are exempted from the definition of speculative transaction:
Trading carried electronically on screen-based system
Through stock broker registered with SEBI
by banks or MF on a recognized stock exchange
Supported by time stamped contract note indicating Unique Client Identity No and
PAN
Determination of turnover in case of speculative and derivative transactions is one of
the important factors for every individual for the income tax purpose. As per the ICAI
guidelines the turnover for the purpose of section 44AB in such type of transactions is
determined below:
Speculative Transactions
The total of favourable and unfavourable differences shall be taken as turnover.
Derivatives Transactions
The total of positive and negative or favourable and unfavourable differences
shall be taken as turnover.
Premium received on sale of options is to be included in turnover.
In respect of any reverse trades entered, the difference thereon shall also form
part of the turnover.
Here it is immaterial, whether the difference is positive or negative. All the
differences whether positive or negative are aggregated and the turnover is
calculated.
Thus, profit or loss from such business will be taxable as income under the head
profits and gains of business or profession. Tax will be charged on such income at the
normal rates applicable to an individual. Such income will be charged under the head
profits and gains of business or profession whether or not the assessee is carrying on
any other business or profession.

Home / Business / economy / Income Tax / Tax Return Filing in case of Futures & Options Trades
Tax Return Filing in case of Futures &
Options Trades
Posted by: Alok Patnia in Income Tax, India, tax payers July 9, 2012 7 Comments
24
SHARES


There is a confusion in the minds of tax payers engaged in non-delivery based trading on the
stock markets, commonly referred to as Futures and Options (or at F&O). We thought it to be
very important to focus on this topic in an article addressing all these related to filing of tax
returns in case of non-delivery based transactions, considering that the due date for tax return
filing is fast approaching.

Individuals engaged in future and options should keep in mind following things for
Income Tax Return filing:
Taxable as Business Income
As per the provision of the Income Tax Act, 1961, income from futures & options (F&O) is
treated as normal business income. Thus, profit or loss from such business (F&O) will be
taxable as income under the head profits and gains of business or profession whether or not
the assesse is carrying on any other business or profession.
Tax will be charged on such income at the normal rates applicable to an individual.
Compliances in case of Profit & Loss
If there is a loss in F&O, here provisions of section 44AD will apply and accordingly audit of
books of accounts will also be required. The provision of this section mandates disclosure of
at least 8 % of net profit on the gross turnover.
So, in case the assesse does not discloses the same (less than 8 per cent or loss) , the assesse
will be required to maintain books of accounts and is required to get tax audit under
provisions of section 44AA and 44AB. Thus, pursuant to this change, income from business
cannot be below 8 per cent of the gross turnover in any circumstances.
So, if there is a profit in F&O and you are disclosing 8% or more of total turnover as profit
then only the income has to be declared as business income and accordingly ITR has to be
filed. There will be no need to maintain books of accounts and of audit.
Turnover Calculation
Now, here comes the point calculation of turnover. Determination of turnover in case of F&O
is one of the important factors for every individual for the income tax purpose. Turnover must
be firstly calculated, in the manner explained below:
1. The total of positive and negative or favorable and unfavorable differences shall be taken
as turnover.
2. Premium received on sale of options is to be included in turnover.
3. In respect of any reverse trades entered, the difference thereon shall also form part of the
turnover.
Here, it makes no difference, whether the difference is positive or negative. All the
differences, whether positive or negative are aggregated and the turnover is calculated.
Tax audit under Section 44AB
As Futures & options (F&O) is treated as normal business income, so, if the total sales,
turnover or gross receipt from business for the previous year relevant to assessment year
exceeds Rs. 60 lacs in FY 2010-11 & 2011-12 (Rs. 1 crore from the FY 2012-13) then its
mandatory to get books of accounts audited.
Expenses
Expenses such as postage, conveyance and telephone, incurred for carrying on the business
can be claimed as business expenses. You can also claim depreciation on assets used for the
business or profession.
Due date for return Filing
In case you are liable for audit under provision of section 44AB or 44AD then the due date of
filing ITR would be 30
th
September of the assessment year (Like for FY 2011-12 due date
would be 30
th
September 2012).
And, in other case or say in case you are not liable for audit then the due date of filing ITR
would be 31
st
July of the assessment year (Like for FY 2011-12 due date would be 31
st
July
2012).
Carry forward & and set off of Loss
If there is a loss in F&O and you are claiming the same in Income Tax Return then you
should file it before due date to carry forward the loss and set off from the income in future.

August 27, 2013
taruntyagi 8
Hi My Wife has no salary income. She has done trading in commodity
derivatives in 2009 - 10. The total profit loss for FY 09-10 was a loss of
71k. The total value of contracts was very high(4 Cr) as the trading is
on a margin. Since her total income was much less than the required
taxable income limit, I did not file a return for her. I have received a
letter from IT asking the reason for non-filing of return for past years
and stating those trans. How should I respond.
Description Is it necessary to file a return in this case. Total income for her including all possible savings
interests etc. has never usually been more than Rs 50k per year.
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guptarajin 2002

No need to worry , Income tax return i required to file only if income is more than exemption limit .Turnover have
no impact .Further as per income tax act 4 crore turnover of commodity will be treated much below than 4 crore
.Trunover here means loss and profit of each transaction .Suppose you buy gold 1kg for 32,00,000 and sold it for
32,10,000 then turnover will be treated as 10000 (diff) only further if you have sold another transaction for
3185000 then turnover 15000 and total turnover will be treated as 10K +15 K =25K
http://www.simpletaxindia.net/2013/06/taxation-of-futures-options-and.html


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