CIT vs. Bharat R. Ruia (Bombay High Court)

Derivatives Loss is “Speculation” Loss u/s 43(5). S. 43(5)(d) is not retrospective

In AY 2003-04, the assessee entered into “exchange traded derivatives” which resulted in a loss of Rs. 28 lakhs which was claimed as a business loss. The AO disallowed the loss on the ground that it was a speculation loss covered by s. 43(5). This was upheld by the CIT (A). However, the Tribunal allowed the appeal of the assessee on the ground that clause (d) to the proviso to s. 43(5) (which provides that derivaives shall not be treated as speculative transactions) inserted by the FA 2005 w.e.f. 1.4.2006 is clarificatory and retrospective. On appeal by the department, HELD reversing the Tribunal:

(i) S. 43(5) defines the expression ‘speculative transaction’ to mean 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 of the “commodity” or scrips. The expression ‘commodity’ is not defined and so has to be given the meaning as understood in common parlance i.e. an article of trade or commerce which is tangible in nature. As futures contracts are articles of trade and commerce which are legally permitted to be traded on the stock exchange, transactions in futures are transactions in a “commodity” as contemplated by s. 43(5). Transactions in futures contracts like transactions in stocks & shares if settled otherwise than by actual delivery would be speculative transactions u/s 43(5);

(ii) The argument that s. 43(5) refers to contracts which are capable of settlement by actual delivery whereas the transactions in futures are incapable of settlement and therefore, transactions in futures fall outside the scope of s. 43(5) is not acceptable because the very object of s. 43(5) is to treat transactions which are settled otherwise than by actual delivery as speculative transactions;

(iii) The argument that clause (d) to the proviso to s. 43(5) inserted by the FA 1995 w.e.f 1.4.2006 is clarificatory and retrospective is not acceptable because (a) it is specifically provided that clause (d) to the proviso to s. 43(5) shall come into operation prospectively w.e.f. 1.4.2006 and (b) the insertion of clause (d) was not necessitated on account of the fact that the s. 43(5) was unworkable or its interpretation resulted in unintended consequences and (c) even after insertion of clause (d), all transactions in derivatives are not taken outside the purview of s. 43(5). It is only those derivative transactions which are covered under clause (d) are taken outside the purview of s. 43(5) and the rest of the transactions in derivatives continue to be covered by s. 43(5).