Sections 43(5), 72, 73 — Assessee is entitled to set off the loss incurred in the business of dealing in derivatives in the assessment years prior to A.Y. 2006-07 against the profits earned in the same business in the A.Y. 2006-07 and later assessment years.
Facts:
During the A.Y. 2006-07 the assessee earned profit of Rs.1,91,48,060 from dealing in derivatives. He had brought forward losses, for A.Y. 2001-02 to 2005-06, from this activity amounting to Rs.4,68,75,320. The assessee in his return of income claimed set-off of brought forward losses against the current years profit and the balance amount of losses amounting to Rs.2,77,27,260 was claimed to have been carried forward to subsequent years. The set-off and also the carry forward as claimed was allowed. Subsequently, the CIT was of the view that the setoff granted by the AO rendered the assessment order erroneous and prejudicial to the interest of the Revenue to the extent of carry forward of losses. The CIT, in view of the amendment to S. 43(5) which he held to be prospective, declined the set-off of past losses (which he considered to be as speculative in nature) in dealing in derivatives against the profits in dealing in derivatives in the current year (which were considered to be non-speculative).
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
(1) The business loss, speculative or nonspeculative, incurred by an assessee in one assessment year can be set off against the profits of the same business, speculative or non-speculative, or any other business in the same category.
(2) The ratio of the decision of the Supreme Court in the case of CIT v. Manmohan Das, (59 ITR 699) (SC) read with the ratio of the decision of the Bombay High Court in the case of Western Oil Distributing Ltd. v. CIT, (126 ITR 497) (Bom.) is an authority for the following significant propositions viz.:
(a) Whether a particular business loss, speculative or non-speculative, incurred by the assessee in an earlier year is eligible for set-off against business income in a subsequent year, is to be taken in the course of proceedings in the subsequent assessment year, i.e., the assessment year in which set-off is claimed;
(b) Section 73(2) confers a statutory right upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set it off against his profits and gains, if any, from the same business for that year. Once this statutory right is recognised, it is a natural corollary of that recognition that when an assessee incurs a loss in a business, speculative or non-speculative, in any year, such loss has to be, subject to the fulfilment of other pre-conditions, to be set off against profits of the same business in subsequent year;
(c) In the course of proceedings of the subsequent assessment year, i.e., the assessment year in which set-off of loss is claimed, it is open to even decide the true nature and character of loss incurred in the earlier relevant assessment year. Even a finding about the nature of loss, in the assessment year in which loss is incurred, does not bind the assessee, and that aspect of the matter can be decided afresh in the course of proceedings in the assessment year in which set-off is claimed.
(3) The question whether the losses incurred in dealing in derivatives 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 section 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 setoff against all business income in accordance with section 72.
(4) The provisions of carry forward and set-off are to be construed in a manner so as not to defeat the plain and unambiguous intention of the Legislature. This amendment was to provide relief to the taxpayers and is to be viewed as beneficial provisions, as such, one cannot possibly proceed on the basis that the object of making amendment in section 43(5) was to kill the brought forward losses of dealing in derivatives or make them ineligible for being set off against the profits of the same business in subsequent years. Whatever may be the characterisation of income for the purpose of intra-assessment year set-off in the relevant assessment year, and irrespective of the fact that such a characterisation has achieved finality in assessment, the losses and profits from dealing in derivatives must be characterised on a uniform basis in the assessment year in which set-off is claimed.
The Tribunal allowed the appeal filed by the assessee and held that there was no infirmity in the AO granting set-off and the order of the AO could not be held to be erroneous and prejudicial to the interest of the Revenue. The revision proceedings were quashed.
