IVF Advisors Pvt. Ltd. vs. ACIT ITAT Mumbai `A’ Bench Before N. K. Billaiya (AM) and Amit Shukla (JM) ITA No. 4798 /Mum/2012 Assessment Year: 2009-10. Decided on: 13th February, 2015. Counsel for assessee/revenue: Kanchan Kaushal, Dhanesh Bafna and Ms. Chandni Shah/Azghar Zain

Facts: The assessee, an investment management consultant, filed its return of income for assessment year 2009-10 returning a total income of Rs. Nil. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has claimed a loss of Rs. 93,63,235 on account of foreign currency futures. The AO disallowed the loss of Rs. 93,63,235 by considering it to be a speculative transaction in view of the provisions of section 43(5) r.w.s. 2(ac) of the Securities Contracts (Regulation) Act, 1956.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the assessee is not in the manufacturing and merchanting business, and is also not a dealer or investor in stocks and shares and therefore the loss on foreign currency futures is not in the nature of hedging loss and that such loss was not incurred in the course of guarding against loss through future price fluctuation in respect of contract for actual delivery of goods manufactured or in respect of stock of shares entered into by a dealer. He held that the provisions of clause (d) of the proviso to section 43(5) were not applicable. He, accordingly, confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held: The Tribunal considered the provisions of section 43(5) of the Act and observed that clause (d) of the proviso to section 43(5) excludes the transaction of trading in derivatives referred to in section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out on a recognised stock exchange from the purview of the definition of the term `speculative transaction’. Considering the definition of the term `derivative’ in section 2(ac) of the Securities Contracts (Regulation) Act, 1956, it observed that derivatives also includes securities. It noted that the Madras High Court has in the case of Rajashree Sugar & Chemicals Ltd. vs. Axis Bank Ltd. AIR (2011), Mad 144 has defined the term derivative to include foreign currency as underlying security of the derivative. It also noted the meaning of the term `derivative’ as explained in the section `Frequently Asked Questions’ on the website of SEBI. On going through the copies of the contract notes, it found that the assessee had entered into either a call option or a put option and on the settlement day, the transaction has been settled by delivery. Either the assessee has paid US Dollar on the settlement day or has taken delivery of the US Dollar.

The Tribunal held that there remains no doubt that the transaction of the assessee cannot be treated as a speculative transaction. Derivatives include foreign currency and call/put option are transactions of derivative markets and cannot be termed as speculative in nature. The Tribunal held that the transactions entered into by the assessee were not speculative transaction and therefore, the loss incurred had to be allowed.

The Tribunal allowed the appeal filed by the assessee.