Loss From Trading In Commodity Derivatives Non-Speculative In Nature, Can Be Set Off Against Regular Business Income: ITAT Lucknow

The Bench, consisting of A.D. Jain (Vice President) and T.S. Kapoor (Accountant Member), held that there is no bar of expertise required for trading in commodity derivatives and that Clause (e) of the first proviso to Section 43(5) does not require any such expertise.

The Assessing Officer (AO) passed an order holding that the derivatives trading in commodities carried out by the Assessee Ramesh Verma was speculative in nature, and thus the loss suffered in derivatives commodity trading could be set off only against its own head and not against the Assessee's regular business income. The AO thus made certain additions to Assessee's income by invoking the provisions of Clause (e) of the first proviso to Section 43 (5) of the Income Tax Act. Against the order passed by the AO, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT (A) upheld the order passed by the AO and confirmed the additions made to the Assessee's income. Against this, the Assessee filed an appeal before the ITAT.

The Assessee Ramesh Verma contended before the ITAT that the loss incurred by it in the business of commodity derivatives trading was non-speculative in nature. The Assessee averred that it was carrying on two businesses, one in medical derivatives and the other in derivatives of commodities, shares and securities, in recognised Stock Exchanges. The Assessee submitted that the loss incurred by it in derivatives trading was non-speculative in nature as per the provisions of Section 43(5) of the Income Tax Act.

The Assessee added that the derivative transactions undertaken by him were dealt with in a recognized Association and that commodity transaction tax had been paid on all transactions by the Assessee. Thus, the Assessee averred that all conditions of an "eligible transaction", as provided under Clause (e) to the first proviso to Section 43 (5), had been complied with. Hence, the Assessee contended that the loss incurred by it in derivatives trading in commodities should be allowed to be set off against the profits from the medical derivatives business carried on by the Assessee.

The revenue department contended that since the Assessee had set off loss from a speculative business against the regular business income, the AO had rightly disallowed the said set off.

Section 43(5) of the Income Tax Act, 1961 provides that the term "speculative 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.

Clause (e) to the first proviso to Section 43(5) provides that an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013, shall not be deemed to be a speculative transaction.

Section 73(1) of the Income Tax Act provides that loss in respect of a speculation business carried on by the Assessee can be set off only against the profits and gains of another speculation business.

The ITAT held that the revenue authorities had not dispute that the transactions were undertaken by the Assessee in respect of trading in commodity derivatives, which were carried out in recognised Associations and on which the commodities transaction tax was paid by the Assessee. Thus, the ITAT ruled that all the requirements of Clause (e) to the first proviso to Section 43(5) were satisfied.

Therefore, the ITAT ruled that the said transactions entered into by the Assessee in respect of trading in commodity derivatives cannot be deemed to be speculative transactions. The ITAT held that the revenue authorities had gone at a total tangent from the requirements of law by disallowing the set off and by making the additions to Assessee's income.

The ITAT noted that the AO had held that the Assessee was doing business in non-agricultural trading, for which he had not submitted any expertise. The ITAT observed that the Assessee was a doctor who practices Radiology. The ITAT held that there is no bar of expertise required for trading in commodity derivatives and that Clause (e) of the first proviso to Section 43(5) does not require any such expertise.

Thus, the ITAT ruled that in view of Clause (e) of the first proviso to Section 43(5), the loss incurred by the Assessee in respect of trading in commodity derivatives was not a speculative loss.

The ITAT observed that Section 70(1) of the Income Tax Act provides that loss from any source under any head of income under the Income Tax Act, other than "Capital Gains", can be set off against income from any other source under the same head.

The ITAT noted that as per the provisions of Section 73 (1) of the Income Tax Act, loss from a speculation business carried on by the assessee can be set off only against the profits and gains of another speculation business.

The ITAT held that in view of the provisions of Section 70(1), Section 73(1) and Clause (e) of the first proviso to Section 43(5), derivatives commodity trading transaction undertaken by the Assessee was not a speculative transaction and thus, the loss arising from it could be set off against the profits of the medical derivatives business carried on by the Assessee.

Thus, the ITAT allowed the appeal and cancelled the additions made by the AO to the Assessee's income.

Case Title: Ramesh Verma versus ACIT

Dated: 18.05.2022 (Lucknow ITAT)

Representative for the Appellant: Mr. Ashok Seth, C.A.

Representative for the Respondent: Mr. Harish Gidwani, D.R

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