Whether transaction of call/put options in foreign currency are "derivatives" and whether loss suffered therein is a "speculation" loss?

IN THE INCOME TAX APPELLATE TRIBUNAL “I”

BENCH, MUMBAI

BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER &

SHRI AMIT SHUKLA, JUDICIAL MEMBER

I.T.A. No. 4798/Mum/2012

Assessment Year : 2009-10

IVF Advisors Private Limited,

Suite F9C, Grand Hyatt Plaza, Santacruz (East),

Mumbai – 400 005

PAN/GIR No. : AABCI 5623F

Appellant

Versus.

The Asstt. Commissioner of Income Tax,

Range 10(1), Mumbai.

Respondent

Appellant by: S/ShriKanchanKaushal,

Dhanesh Bafna & Ms.Chandni Shah

Respondent by: Shri Asghar Zain V.P

Date of Hearing: 09.02.2015

Date of Pronouncement:13.02.2015

O R D E R

PER N.K. BILLAIYA, AM:

This appeal by the assessee is preferred against the order of Ld. CIT(A)-21, Mumbai dated 16/4/2012 and pertaining to assessment year 2009-10. The grievance of the assessee read as under:

 “On the facts and circumstances of the case, and in law, the learned CIT(A) ought to have held that clause (d) of the proviso to section 43(5) of the Income Tax Act, 1961 (‘the Act’), was applicable to the transactions in foreign currency futures entered into by the appellant and therefore that the loss from these transactions was not in the nature of speculation loss.”

2. Briefly stated, the facts of the case are that the assessee is an Investment Management Consultant. The return for the year was filed on 25/09/2009 declaring total income at Rs.Nil. The return was selected for scrutiny assessment. Statutory notices were issued and served upon the assessee.

3. While perusing the profit and loss account of the assessee, the AO noticed that the assessee has claimed a loss of Rs.93,63,235/- on account of loss on foreign currency futures. The AO was of the strong belief that the loss cannot be allowed in the light of the provisions of section 43(5) of the Income Tax Act, 1961 (the Act) r.w. clause (ac) of section 2 of the Securities Contracts (Regulation) Act 1956. While disallowing the loss of Rs.93,63,235/-, the AO has considered the relevant provisions of section 43(5) of the Act and section 2(ac) of the Securities Contracts (Regulation) Act.

4. Aggrieved by this finding of the AO the assessee carried the matter before Ld. CIT(A). It was strongly contended that the contracts in foreign currency futures were not speculative transaction. It was further explained that the foreign currency contract does not satisfy the condition of being a speculative transaction and, therefore, the loss on account of foreign currency futures was not speculative loss. After considering the facts and the submissions, Ld. CIT(A) observed that the assessee is not engaged in manufacturing or merchanting business and was also a dealer and investor in stock and shares. Therefore, the loss of Rs.93,63,235/- earned by the assessee on account of transactions in foreign currency future was not in the nature of hedging loss, therefore, such loss was not earned in the course of guarding against loss through future price fluctuation in respect of contracts for actual delivery of goods manufactured or in respect of stock of share entered into by a dealer. Ld. CIT(A) was of the firm belief that proviso (d) to section 43(5) was not applicable. Ld. CIT(A) confirmed the assessment order holding that the AO has correctly held that such loss was a speculation loss within the meaning of section 43(5) of the Act. Aggrieved by this assessee is before us.

5. Ld. Counsel for the assessee reiterated what has been submitted before lower authorities. Ld. Counsel for the assessee drew our attention to proviso (d) of section 43(5) of the Act and stated that the Revenue Authorities have failed to interpret the said proviso. It is the say of the Ld. Counsel that the contracts entered by the assessee cannot be said to be of speculative in nature because the contracts have ultimately been settled by the delivery of Forex.

6. Per contra , Ld. DR strongly supported the order of Ld. CIT(A).

7. We have carefully perused the orders of the Revenue Authorities and the submissions made by the assessee in the light of the relevant provisions of the IT Act and also Securities Contract Regulation Act, 1956. Section 43(5) of the I.T. Act read as under:

“(5) 32"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity33, including stocks and shares, is periodically or ultimately settled33 otherwise than by the actual delivery33 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 236 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;[or]

(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association[ which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013)]shall not be deemed to be a speculative transaction.

[Explanation.—For the purposes of this clause, the expressions—

To read the full judgment, please find the attached file:

Attached file:

http://www.itatonline.in:8080/itat/upload/-860488428721844991313$5%5E1REFNO4798-AS-I-09.02.pdf