Loss In Derivatives Is Not A Speculative Transaction And Can Be Set Off Against Business Income Of Assessee: Kerala High Court
Mehak Dhiman
4 Dec 2024 5:05 PM IST
The Kerala High Court stated that loss in derivatives is not a speculative transaction and can be set off against business income of the assessee. Further, this is not a case where Section 73 of Income Tax Act is attracted since it deals with losses in speculation business. The Bench of Justice A.K. Jayasankaran Nambiar observed that “……..a loss in the derivative...
The Kerala High Court stated that loss in derivatives is not a speculative transaction and can be set off against business income of the assessee. Further, this is not a case where Section 73 of Income Tax Act is attracted since it deals with losses in speculation business.
The Bench of Justice A.K. Jayasankaran Nambiar observed that “……..a loss in the derivative business would consequently be a business loss for the purposes of Section 72, and a set off of such business loss would have to be permitted against profits and gains of business as computed in terms of the I.T. Act……..”
Section 73(1) of the Income Tax Act, 1961, provides that any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
The assessee/respondent during the previous year relevant to the assessment year 2007-08, 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 Income Tax Act, 1961, found that the speculative loss could not be set off against other business income of the assessee.
Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the First Appellate Authority which was rejected.
The assessee filed an appeal before the Tribunal. Since the disallowance by the Assessing Officer was in terms of Rule 8D that was inserted into the Income Tax Rules with effect from 24.03.2008, the Tribunal found that the provisions of Rule 8D could not be applied for the assessment year 2007-08 since there was no retrospective operation envisaged for the Rules.
The Department/appellant has challenged the order passed by the Appellate Tribunal before the Kerala High Court.
The bench noted that once the provisions of Section 43(5), as amended, came to treat a trade in derivatives as not a speculative transaction when it was carried out on a recognised stock exchange, then the effect of that amendment was to treat the transaction in derivatives as merely a business transaction.
“A loss in the derivative business would consequently be a business loss for the purposes of Section 72, and a set off of such business loss would have to be permitted against profits and gains of business as computed in terms of the I.T. Act. In other words, this was not a case where Section 73 was attracted at all since Section 73 deals specifically with losses in speculation business,” added the bench.
The bench agreed with the Tribunal that since the transaction in derivatives was not a speculative transaction, the disallowance of the set off by the Assessing Officer was clearly illegal.
In view of the above, the bench dismissed the appeal.
Case Title: The Principal Commissioner of Income Tax Kochi v. M/s Dewa Projects Pvt. Ltd.
Case Number: I.T.A.NO.82 OF 2018
Counsel for Appellant/ Department: Jose Joseph
Counsel for Respondent/ Assessee:P.P. Faisal,D.Reetha.
Citation: 2024 LiveLaw (Ker) 778
