Shree Capital Services vs. ACIT (ITAT Kolkota Special Bench)

Futures & Options are speculative transactions u/s 43(5). S. 43 (5)(d) is not retrospective

In respect of AY 2004-2005, the assessee suffered a loss on account of trading in futures and options. S. 43 (5) defines a “speculative transaction” as one in which a contract for purchase and sale of any commodity, including stocks and shares, is settled otherwise than by actual delivery. Clause (d) was inserted in s. 43 (5) by the Finance Act, 2005 w.e.f 1.4.2006 to provide that “an eligible transaction of trading in derivatives” shall not be deemed to be a speculative transaction. The Special Bench had to consider (i) whether transactions in derivatives are a “speculative transaction” u/s 43 (5) and if so (ii) whether clause (d) of s. 43 (5) is clarificatory and retrospective in nature. HELD, deciding against the assessee:

(i) A ‘derivative’ is a security representing the value of the underlying stocks and shares and must be given the same treatment as that given to the stocks and shares. Also, s. 43 (5) uses the term “commodity” in a wide sense and covers ‘derivatives’. Further, the fact that s. 43(5)(d) exempts certain derivatives from the ambit of the definition of ‘speculative transaction’ shows that they would otherwise have come within that term as otherwise the amendment would be redundant.

(ii) Clause (d) of s. 43(5) cannot be held to be clarificatory because it does not exempt all transactions in derivatives but only the ‘eligible transactions’ on ‘recognized stock exchanges’. Rules 6DDA & 6DDB which deal with ‘recognized stock exchanges’ were inserted w.e.f. 1.7.2005. Consequently, it applies only to AY 2006-2007 & onwards.