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| DATE: | June 1, 2011 (Date of publication) |
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| Click here to download the judgement (gajendra_agarwal_speculative_loss.pdf) |
Post s. 43(5) amendment, pre-AY 2006-07 derivatives “speculation” losses have to be treated as “non-speculation” business losses for purposes of set-off
For AY 2006-07, the assessee earned profits from derivative transactions which were set-off against the earlier year’s losses from derivative transactions. The AO allowed the set-off though the CIT revised the assessment u/s 263 on the ground that as pre-amendment to s. 43(5) by the FA 2005 w.e.f. 1.4.2006, derivatives transactions were treated as “speculative transactions”, the losses therefrom could only be set-off against speculative profits and not against normal profits. On appeal to the Tribunal, HELD allowing the appeal:
(i) When an assessee suffers a loss in business, speculative or non-speculative, he has a statutory right to carry forward the unabsorbed loss and set it off against profits and gains from the same business for the next year. The true nature of the loss has to be determined in the year of set-off. A finding as to the character of the loss reached in the year of incurring the loss is not binding in the year of set-off of the loss, even though the assessment may have reached finality. As such dual characterization is permissible (Manmohan Das 59 ITR 699 (SC) & Western India Oil Distributing Ltd 126 ITR 497 (Bom) followed);
(ii) Though, as held in CIT vs. Bharat Ruia, derivatives transactions, prior to the amendment to s. 43(5) w.e.f. AY 2006-07, are “speculative transactions” and the losses suffered therefrom are “speculative losses”, the question whether they are eligible for set-off has to be determined as per the law prevailing in the year of set-off. As in the year of set-off, derivatives transactions are not, pursuant to the amendment to s. 43(5), treated as “speculative transactions”, the losses incurred prior to the amendment have to be treated as normal business losses and are eligible for set-off against all business income in accordance with s. 72 (Shreegopal Purohit 33 SOT 1 distinguished);
(iii) Also, the question whether the assessment order is erroneous or not has to be determined as per the then prevailing law and as it was then held that the amendment to s. 43(5) was clarificatory and that derivative transactions were not speculative transactions, the order was not erroneous (G.M. Stainless Steel 263 ITR 255 (SC) followed)
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