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Deals before 2006 were speculative, rules ITAT
September, 05th 2009

It is a ruling that could have an impact on assessments of stock market brokers and derivatives traders prior to April 2006. 

In variance to a Mumbai tribunal ruling, a special bench of the Kolkata Income Tax Appellate Tribunal (ITAT) recently held that derivatives transactions conducted before April 2006 were speculative, and income or loss arising from such deals cannot be offset against non-speculative losses or gains.

Tax experts pointed out that in light of the ruling, several old cases involving stock market constituents could be reopened or pending assessments could be severely hit. They expect the special bench ruling to be contested in a higher court.

The special bench judgement was delivered in a case pertaining to a Kolkata-based assessee Shree Capital Services for the assessment year 2004-05. It varied with a Mumbai tribunal ruling of September 25, 2007, in case of SSKI Investor Services for the assessment year 2001-02. The Kolkata special bench ruled: "Futures and options transactions are speculative U/S 43(5). Sec 43 (5) (d) is not retrospective."

Prior to the amendment of Section 43(5) of the IT Act, there was ambiguity regarding the treatment of income or loss generated from derivatives transactions. However, the ambiguity was removed by an amendment {S. 43(5)(d)} effective from April 2006, which ruled that if such transactions were carried out on recognised stock exchanges, they would not be deemed speculative.

The Bombay tribunal had in 2007 clarified the amendment to Section 43(5) was retrospective by ruling, "Dealing in derivatives is a separate type of transaction, which does not involve any purchase or sale of shares. Therefore, a loss on account of derivatives trading cannot be treated as speculative at all."

When contacted, most brokers said they were unaware of the special bench judgement. Currently, loss or profit from a derivatives transaction can be offset against other non-speculative profit or loss. This provides some tax relief to assessees, who deal in stock futures and options. However, by ruling that the amendment is not retrospective, assessments pending prior to April 1, 2006 will be hit, with assessees being unable to avail of tax relief.

"Although the special bench judgement practically overrules the division bench judgement, there are several other Supreme Court judgements upholding the view that any amendment which is clarificatory in nature is always retrospective," said chartered accountant Bhupendra Shah.

"Therefore, the special bench judgement is most likely to be contested further before the Kolkata High Court on that line."

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