Derivatives losses qualified as business losses can be set off against business income, differentiating from speculative losses under income tax law.

The Court : - This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 4.5.2011 passed by the Income Tax Appellate Tribunal, “A” Bench, Kolkata (the Tribunal) in ITA /1033/Kol/2011 for the assessment year 2008-09.

The revenue has raised the following substantial questions of law for consideration :

“1. Whether on the facts and in the circumstances of the case the learned Tribunal was justified in law in holding that the loss on trading in future and options is business loss of Rs.51.71 crore which can be set off against business income disregarding the explanation below Sec.73 and Circular No.204 dated 24.7.1976 under which such loss has to be treated as speculative loss which cannot be set off against other business income.”

We have heard Mr. Aryak Dutta, learned senior standing counsel assisted by Mr. Prithu Dudhoria, learned advocate for the appellant/department and Mr. J. P. Khaitan, senior counsel assisted by Mr. Sanjay Bhaumik for the respondent/assessee.

The substantial question of law raised by the revenue in the instant case was considered by the Hon’ble Division Bench of this court in the case of Asian Financial Services Ltd. vs. Commissioner of Income Tax-3, Kolkata; [2016] 70 taxmann.com 9 (Calcutta) . In the said appeal filed by the assessee identical question of law was raised in questions of law (b) and (c) in paragraph 1 of the said reported decision. The Hon’ble Division Bench allowed the assessee’s appeal.

Before us, the learned senior standing counsel placed reliance on Section 73 of the Act stating that the said provision is a specific provision whereas what was relied on by the assessee and accepted by the appellate authority namely, section 43(5) is a general provision and submitted that a company dealing in purchase and sale of shares amongst others, which does not come within the exceptions carved out in the explanation itself, is hit by the mischief of the explanation under Section 73 (4) of the Act. Further, it is submitted by the learned senior standing counsel that when the business consisting of purchase and sale of shares of other companies amounts to a speculation business, can it be said that the business in derivatives, which depend upon the value of the underlying shares, is anything other than a speculation business.

Identical submissions were made before the Hon’ble Division Bench in Asian Financial Services Ltd. b>. and the argument of the revenue was rejected. At this juncture, it will be beneficial to refer to the relevant paragraphs of the said judgment.

“8. We have not been impressed by the submissions advanced by Mr.Lodh. How can it be said that Sub-section (5) of Section 43 is a general provision and the provision contained in Section 73 is specific in nature? On the contrary, we are inclined to think that the object of Sub-section (5) of section

43 is to define 'speculative business'.

9. Group-D of Chapter-IV of the Income Tax Act consists of Sections 28 to 44DB. When the statute talks of profit, it also talks of losses because loss has been construed as a negative profit. Sections in Group-D of Chapter-IV evidently deal with profits and losses of business or profession. Explanation

2 to Section 28 provides as follows:

Explanation 2.-Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business.

10. From a plain reading of the Explanation 2, the following deductions can be made:-

(a) Speculative transactions carried on by an assessee may be of such a nature as to constitute a business:

(b) Such speculati