Exemption given in s. 43(5) to derivatives from being treated as "speculative transaction" not available to Expl to s. 73

CIT vs. DLF Commercial Developers Ltd (Delhi High Court)



In AY 2007-08 the assessee suffered a loss of Rs. 4.92 crore on account of transactions in derivatives. It claimed that as the Explanation to s. 43(5) inserted by the Finance Act 2005 w.e.f. 1.4.2006 exempted derivatives from the ambit of a "speculative transaction", the loss from trading of derivatives was not a speculative loss and could not be disallowed. The AO & CIT(A) rejected the contention and held that the Explanation to s. 73 was independent of s. 43(5) and the said loss had to be treated as a speculation loss. However, the Tribunal held that derivative transactions were separate from trading in shares and that the Explanation to s. 73 will not be applicable. On appeal by the department, HELD reversing the Tribunal:

Though the Explanation to s. 43 (5) excludes derivative transactions from the ambit of a “speculative transaction”, there is nothing to show that derivative transactions are also excluded from the mischief of Explanation to s. 73 (4). S. 73 provides that the loss arising to a company out of purchase and sale of shares shall be deemed to be a "speculation loss". As derivatives are assets whose values are derived from the underlying assets, the loss on account of derivative transactions also constitutes a "speculation loss' (Bharat Ruia 337 ITR 452 (Bom) & Rajshree Sugars v. Axis Bank Ltd AIR 2011 Mad 144 referred)