Derivative transaction through MCX after 1-4-2006 to be treated as non-speculativePosted InIncome Tax Case Laws|Featured,Judiciary|1 Comment IN THE ITAT MUMBAI BENCH AAssistant Commissioner of Income-tax, Circle-16(1)v/s.Arnav Akshay MehtaIT APPEAL NO. 2742 (MUM.) OF 2011[ASSESSMENT YEAR 2007-08]SEPTEMBER 12, 2012ORDERAmit Shukla, Judicial MemberThe 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 ofDCITv.SSKI Investors Services P. Ltd.(113 TTJ 511) andRB 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, inP.S. Kapoorv.ACIT, reported in 29 SOT 587, and the Tribunal, Chennai Bench decision inDCITv.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 inShree 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.ACITv.Hiren Jashwantrai Shah12 taxmann.com 55 (Ahd.), 46 SOT 276;2.Smt. Seema Jainv.ACIT49 SOT 30;3.Pradeep Kumar Harlalkav.ACIT47 SOT 204;4.ACITv.Parimal D. Nathwani9 taxmann.com 2845.G.K. Anand Bros Buildwell P. Ltd.v.ITO34 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.- See more at: http://taxguru.in/income-tax-case-laws/derivative-transaction-mcx-142006-treated-nonspeculative.html#sthash.AmsmXwsX.dpuf

Despite Section 43(5) Exemption, Derivatives Loss Is Speculation Loss For CompaniesPosted InIncome Tax Case Laws|Judiciary|No Comments Issue-Did the Income Tax Appellate Tribunal (ITAT) fallinto error in not holding that the loss of Rs.4,92,71,000/- on account of derivative transaction wasa speculative loss, and was entitled to the benefit of Section 73, in view of the Explanation to Section 73 of the Income Tax ActBrief 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 DELHIReserved on: 06.05.2013 Pronounced on: 11.07.2013ITA 94/2013THE COMMISSIONER OF INCOME TAX DELHI-IVVersusDLF COMMERCIAL DEVELOPERS LIMITEDCORAM:HONBLE MR. JUSTICE S. RAVINDRA BHATHONBLE MR. JUSTICE NAJMI WAZIRIMR. JUSTICE S.RAVINDRA BHAT1. 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) fallinto error in not holding that the loss of Rs.4,92,71,000/- on account of derivative transaction wasa 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 asCIT v. Intermetal Trade Ltd.,2006 (285) ITR 536 (M.P.);CIT v. Arvind Investments Ltd.,1991 (192) ITR 365 (Cal) andEastern 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 inRajshree 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 asCITv. 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 speculationbusiness carried on by the assessee, shall not be set offexcept against profits and gains, if any, of anotherspeculation 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 himassessable for that assessment year; and(ii)if the loss cannot be wholly so set off, the amount ofloss not so set off shall be carried forward to thefollowing assessment year and so on.(3) In respect of allowance on account of depreciation orcapital expenditure on scientific research, the provisions of sub-section (2) ofsection 72shall 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 succeedingthe assessment year for which the loss was first computed.[Explanation.Where any part of the business of acompany [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 thecontext otherwise requires-********** *********(5)Speculative transactionmeans a transaction in whicha 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 merchandiseentered 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 inhis holdings of stocks and shares through price fluctuations; or(c)a contract entered into by a member of a forwardmarket 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 transactionmeans any transaction -(A)Carried out electronically on screen-based systemsthrough a stock broker or sub-broker or such otherintermediary 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 noteissued by such stock broker or sub-broker or suchother intermediary to every client indicating in thecontract 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 arecognized stock exchange as referred to inclause (f) of section 2 of the SecuritiesContracts (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 inRajshree Sugars and Chemicals Ltd (supra),the Madras High Court noticed, rather dramatically, that ..Derivatives are timebombs and financial weapons of mass destruction said WarrenBuffett, 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 havegained such a great deal of notoriety? In simpleterms, 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 changein 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. InThe Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & AnrAIR 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, inN.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 inwhich 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 companiesare 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)- See more at: http://taxguru.in/income-tax-case-laws/section-435-exemption-derivatives-loss-speculation-loss-companies.html#sthash.2OyIf intention for trade in share is earning quick Profit by frequent trading, such profit taxable as business incomePosted InIncome Tax Case Laws|Judiciary|No Comments ITAT RAJKOT BENCHDeputy Commissioner of Income-taxVersusMukeshbhai Babulal ShahIT Appeal No. 318 (Rajkot) of 2011[ASSESSMENT YEAR 2008-09]FEBRUARY 8, 2013ORDERD.K. Srivastava, Accountant MemberThe 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 inSugamchand C. Shahv.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 ofSugamchand C. Shahv.ACIT37 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 ofSugamchand 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 inWallfort 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 ofGopal Purohitv.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 inSardar Indra Singh & Sons Ltd.v.CIT[1953] 24 ITR 415as 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 thePrivy 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.InG. 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.InH. 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 inWallfort 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 inCITv.Gopal Purohit[2011] 336 ITR 287and by the Honble Supreme Court inSardar 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 inWallfort 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- See more at: http://taxguru.in/income-tax-case-laws/intention-trade-share-earning-quick-profit-frequent-trading-profit-taxable-business-income.html#sthash.1Rrbghbc.dpufsFBoH.dpuf How to Compute Turnover In Case of Future & Options, Speculation for Tax AuditPosted InIncome Tax|Articles|10 Comments QueryI 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?ReplyIn 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.QueryI 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?ReplyIn 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 theRoyal Cushion Vinyl Products Ltdcase.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.QueryIn case of `options and `futures, is the gain or loss to be treated as speculation loss?ReplyThe 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; andb)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 exchangemeans 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;]QueryHow 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.ReplyThe 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:- The total of positive and negative differences , plus Premium received on sale of options is also to be included in turnover ,plus In respect of any reverse trades entered, the difference thereon But not the total value of contract.- See more at: http://taxguru.in/income-tax/how-to-compute-turnover-in-case-of-future-and-options-trades-speculation-trades-and-applicability-of-tax-audit-us-44ab-of-the-income-tax-act-1961.html#sthash.7c8IJbft.dpuf Computation of turnover for speculative transactions, derivative transactions, futures and options

POSTED BYALOK PATNIAON 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 PANDetermination 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.DerivativesTransactions 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 TradesTax Return Filing in case of Futures & Options TradesPosted by:Alok PatniainIncome Tax,India,tax payersJuly 9, 2012 7 Comments24SHARESThere 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 tofiling of tax returnsin 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 IncomeAs 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 & LossIf 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 CalculationNow, 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 44ABAs 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.ExpensesExpenses 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 FilingIn case you are liable for audit under provision of section 44AB or 44AD then the due date of filing ITR would be 30thSeptember of the assessment year (Like for FY 2011-12 due date would be 30thSeptember 2012).And, in other case or say in case you are not liable for audit then the due date of filing ITR would be 31stJuly of the assessment year (Like for FY 2011-12 due date would be 31stJuly 2012).Carry forward & and set off of LossIf 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, 2013taruntyagi 8Hi 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.DescriptionIs 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.Total Views: 1436|Total Answers:1 |RatingReport AbuseEmail This HYPERLINK "javascript:;" HYPERLINK "javascript:;" HYPERLINK "javascript:;" HYPERLINK "javascript:;" HYPERLINK "javascript:;" Rate the question Answers to the questionDisplay order guptarajin 2002No 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 =25Khttp://www.simpletaxindia.net/2013/06/taxation-of-futures-options-and.html