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Bombay High Court held that Section 43(5) has prospective effect from 1.4.2006

Commissioner of Income-tax, Mumbai vs Bharat R. Ruia (HUF), Phoenix Mills Premises, Mumbai

[BOMBAY HIGH COURT, 18 Apr 2011]

Assessee (HUF), engaged in the business of trading in shares and securities, entered into certain derivative transactions which resulted in loss amounting to Rs. 28,37,707/- – Assessee claimed said loss as business loss – Assessing Officer (AO) rejected said contention of the assessee and held that the loss incurred was speculation loss covered u/s. 43(5) of the Act – Commissioner dismissed appeal filed against said order – Tribunal held that the losses incurred from the derivative transactions by the assessee in a/y 2003-04 could not be treated as speculation losses as clause (d) inserted to the proviso to s. 43(5) of the Act w.e.f. 1.4.2006 was retrospective in nature – Hence, the instant appeal – (A) Whether the transactions in exchange traded financial derivatives were ‘speculative transactions’ as defined in s. 43(5) of the Act, 1961? – Held, s. 43(5) of the Act provides that a transaction for purchase/sale of any commodity would be a speculative transaction if it was settled otherwise than by actual delivery – For the purposes of s. 43(5) of the Act, it was not necessary that the commodity agreed to be purchased or sold must be capable of actual delivery – In the instant case, the assessee had entered into futures contracts for purchase of shares of certain companies at a specified future date and at a specified price, which were to be settled in cash without actual delivery of the shares – Future contracts for purchase / sale of an underlying security permitted to be traded on the stock exchange and settled otherwise than by actual delivery would be speculative transactions u/s. 43(5) of the Act – Hence, the exchange traded derivative transactions carried on by the assessee during a/y 2003-04 were speculative transactions covered u/s. 43(5) of the Act – (B) Whether clause (d) inserted to the proviso to s. 43(5) of the Act w.e.f. 1.4.2006 would apply to such transactions undertaken in the a/y 2003-04? – Held, firstly, the legislature by Finance Act, 1995 has specifically provided that clause (d) to the proviso to s. 43(5) of the Act shall come into operation prospectively w.e.f. 1.4.2006 – Secondly, insertion of clause (d) was not necessitated on account of the fact that the provisions of s. 43(5) of the Act were unworkable – Thirdly, even after insertion of clause (d) in s. 43(5) of the Act, all transactions in derivatives were not taken outside the purview of s. 43(5) of the Act – It was only those derivative transactions which were covered under clause (d) were taken outside the purview of s. 43(5) of the Act and the rest of the transactions in derivatives would continue to be covered u/s. 43(5) of the Act – Hence, contention of assessee that clause (d) inserted to the proviso to s. 43(5) of the Act had retrospective effect cannot be accepted – Clause (d) inserted to the proviso to s. 43(5) of the Act w.e.f. 1.4.2006 was prospective in nature and cannot be apply to transactions undertaken in the a/y 2003-04- Impugned order of the Tribunal set aside – Revenue’s appeal allowed.

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