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2024 Supreme(Online)(KER) 55413
HIGH COURT OF KERALA
A. K. Jayasankaran Nambiar, Easwaran S., JJ
THE PRINCIPAL COMMISSIONER OF INCOME TAX KOCHI-1 – Appellant
Versus
M/S.DEWA PROJECTS PVT. LTD. – Respondent
I.T.A.NO.82 OF 2018
For the Appellants/Petitioners: Sri.Jose Joseph
For the Respondents: Sri.Shiyas K.R., Sri.P.P.Faisal(K/1340/1998), Smt.D.Reetha(K/1069/2003)
Losses from derivative transactions are not speculative under Section 73 of the Income Tax Act, allowing them to be set off against business income.
Headnote:(A) Income Tax Act - Sections 43 and 73 - Assessment year 2007-08 - The Tribunal found that losses from derivative transactions should not be classified as speculative losses under Section 73, as per the amended definition in Section 43 - The Assessing Officer's treatment of the loss as speculative was deemed illegal. (Paras 4-9)
(B) Speculative Transactions - Definition - The amendment to Section 43 clarifies that derivatives trading on recognized stock exchanges is not speculative, allowing losses to be set off against business income. (Paras 8-9)
(C) Exempt Income - The Tribunal disallowed 2% of exempt income as expenditure, directing the Assessing Officer to apply this rule only prospectively, not retroactively. (Paras 4-5)
Facts of the case:
The respondent company, engaged in property development, reported a significant carried forward loss from derivatives which was classified as speculative by the Assessing Officer. The Tribunal ruled against this classification.
Findings of Court:
The Tribunal's order was upheld, confirming that the carried forward loss from derivatives is not speculative and can be set off against business income.
Issues: The court addressed whether the bifurcation of losses was necessary and the legality of the Tribunal's directives regarding exempt income.
Ratio Decidendi: The court affirmed that losses from derivatives should not be treated as speculative losses under Section 73, based on the amendments to Section 43. The classification of such losses as speculative was found to be incorrect.
Result: I.T. Appeal dismissed.
| Table of Content |
|---|
| 1. the case involves a tax appeal concerning speculative loss treatment. (Para 1 , 2) |
| 2. the parties argued about bifurcation of losses and applicability of tax rules. (Para 3 , 5 , 7) |
| 3. the court analyzed the implications of amendments to tax laws on speculative transactions. (Para 4 , 6 , 8) |
| 4. the court concluded that derivative transactions do not constitute speculative transactions. (Para 9) |
JUDGMENT
D r. A.K. Jayasankaran Nambiar, J.
This I.T. Appeal is preferred by the Revenue against the order dated 19.03.2018 of the Income Tax Appellate Tribunal, Cochin Bench in I.T.A.No.219/Coch/2014 pertaining to the assessment year 2007-08 under the Income Tax Act [hereinafter referred to as the “I.T. Act”].
2. The brief facts necessary for the disposal of the I.T. Appeal are as follows:
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 said year.
3. 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.
4. In the further appeal preferred by the assessee before the Appellate Tribunal, the Tribunal placed reliance on a judgment of the Calcutta High Court in M/s. Balji Securities Pvt. Ltd. - [88 CCH 313] to find that inasmuch as Section 43 of the I.T. 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 I.T. Act. In holding so, the Tribunal also distinguished the judgment of the Delhi High Court inCommissioner of Income Tax v. DLF Commercial Developers Ltd. - [(2013) 261 CTR (Del) 127], wherein it was held that determination of stock derivatives value is dependent on shares and hence, the provisions of Section 73 of the I.T. Act would be applicable to the derivative business, and accordingly, the loss on account of derivative transactions would not be allowed to be carried forward and set off against non-speculative business income. The Tribunal thereafter remitted the issue to the file of the Assessing Officer to bifurcate the speculative loss and normal business loss. The Tribunal also disallowed 2% of the exempt income as expenditure incurred for the purposes of earning exempt income. This was in relation to an amount of Rs.8,40,000/- which the Assessing Officer had disallowed under Section 14A of the I.T. Act as the assessee had earned exempt income of Rs.8.97 lakhs. Since the disallowance by the Assessing Officer was in terms of Rule 8D that was inserted into the Income Tax Rules [hereinafter referred to as the “I.T. Rules”] with effect from 24.03.2008, the Tribunal found that the provisions of Rule 8D could not be applied f
