The Kerala High Court has held that a loss in the trade derivative would consequently be a business loss for the purposes of Section 72, and a set off of business loss would have to be permitted against profits and gains of business as computed in terms of the Income Tax Act.
The bench of Justice A.K.Jayasankaran Nambiar and Justice Easwaran S. has observed that once the provisions of Section 43(5), as amended, came to treat a trade in derivatives as not a speculative transaction when it was carried out on a recognised stock exchange, then the effect of that amendment was to treat the transaction in derivatives as merely a business transaction.
The respondent/assessee is a company engaged in property development and is currently under liquidation. During the previous year relevant to the assessment year 2007-08, the assessee had returned business income in connection with its property business but had also netted off a loss of Rs.803.03 lakhs, which was the carried forward loss from previous years in relation to its business of trading in derivatives.
The Assessing Officer treated the loss of Rs.803.03 lakhs as speculative loss and, going by the provisions of Section 73 of the I.T. Act, found that the speculative loss could not be set off against other business income of the assessee. The assessment was completed accordingly by cancelling the set off and adding the amount of Rs.803.03 lakhs to the business income for the year.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the First Appellate Authority, where the assessee inter alia argued that only an amount of Rs.283 lakhs represented the carry forward loss from trading in shares whereas an amount of Rs.591 lakhs represented the carry forward loss from dealing in derivatives.
The First Appellate Authority, however, rejected the contention of the assessee in toto and affirmed the order of the Assessing Authority.
Section 43 of the Income Tax Act had been amended with effect from 01.04.2006, and had clarified that delivery based transactions and derivative transactions would not attract the definition of “speculative transaction” for the purposes envisaged under Section 43, the authorities below had erred in treating the carried forward loss from derivative business as ‘speculative loss’ for the purposes of Section 73 of the Income Tax Act.
The department contended that the definition of “speculative transaction” in Section 43 of the Income Tax Act has to be seen as limited for the purposes of determining the income from profits and gains of business or profession and not for the purposes of Section 73 of the Income Tax Act that deal with the circumstances under which the losses in speculation business can be carried forward.
The court noted that the Tribunal has rightly held that since the transaction in derivatives was not a speculative transaction, the disallowance of the set off by the Assessing Officer was clearly illegal.
The court dismissed the appeal against the Revenue and in favour of the assessee.
Case Details
Case Title: PCIT Versus Dewa Projects Pvt. Ltd.
Case No.: I.T.A.NO.82 OF 2018
Date: 2/12/2024
Counsel For Appellant: Jose Joseph
Counsel For Respondent: Shiyas K.R.
