Facts of the Case

The assessee, Shri Arup Banerji, is a medical professional who was also engaged in derivative trading. For Assessment Year 2015-16, the assessee claimed a loss of ₹1,57,21,804 from derivative trading and sought to set off the same against income from his medical profession.

The assessment was completed under Section 143(3) of the Income Tax Act on 30.12.2017. The Assessing Officer treated the derivative loss as speculative in nature and denied set-off on the ground that the assessee failed to submit time-stamped contract notes and other documentary evidence as required under Explanations 1 and 2 to Section 43(5).

The Commissioner of Income Tax (Appeals) upheld the assessment order and dismissed the appeal, holding that the assessee had not established compliance with statutory conditions despite claiming benefit based on earlier years.

 Issues Involved

  1. Whether loss from derivative trading could be treated as business loss eligible for set-off against professional income.
  2. Whether compliance with conditions prescribed under Explanations 1 and 2 to Section 43(5) is mandatory for claiming such set-off.
  3. Whether earlier favourable ITAT decisions in assessee’s own case automatically entitle the assessee to similar relief in the relevant year.

 Petitioner’s (Assessee’s) Arguments

The assessee contended that derivative trading is specifically excluded from the definition of speculative transaction under Section 43(5). It was argued that in earlier assessment years 2012-13 and 2013-14, the ITAT had already allowed set-off of derivative loss against business income in the assessee’s own case.

It was further submitted that audited derivative trading accounts, broker statements, demat account details, and information obtained by the Department under Section 133(6) were sufficient to establish the genuineness of the transactions. The assessee also submitted that the Assessing Officer had not specifically asked for time-stamped contract notes during assessment proceedings.

 Respondent’s (Revenue’s) Arguments

The Revenue argued that the principle of res judicata does not apply to income-tax proceedings and that compliance with Section 43(5) conditions must be demonstrated for each assessment year independently. It was submitted that the assessee failed to produce time-stamped contract notes or broker certificates to prove that the derivative transactions satisfied statutory requirements.

The Revenue also pointed out that derivative income was not properly reflected in the audited profit and loss account of the assessee’s medical profession and that statutory audit requirements under Section 44AB were not fully complied with for derivative transactions.

 Court Order 

The ITAT observed that although derivative trading losses had been allowed as business losses in earlier years, the assessee was still required to furnish basic evidence for the year under consideration to demonstrate compliance with Explanations 1 and 2 to Section 43(5).

The Tribunal noted that there was a dispute as to whether broker statements had actually been furnished before the Assessing Officer and that enquiries under Section 133(6) had been conducted but their outcome was not clearly brought on record. Considering the overall facts, the past history of the assessee, and the need to ascertain the true nature of the transactions, the Tribunal held that the matter required fresh examination.

Accordingly, the ITAT set aside the orders of the lower authorities and restored the issue to the file of the Assessing Officer for fresh adjudication in accordance with law after examining whether the derivative transactions satisfied the statutory conditions. The appeal was allowed for statistical purposes.

 Important Clarification 

Derivative trading loss can be treated as business loss only if the conditions laid down under Explanations 1 and 2 to Section 43(5) are fulfilled. Prior favourable decisions do not dispense with the requirement of furnishing relevant evidence for each assessment year. Where facts require verification, the matter may be restored for fresh adjudication to ensure compliance with statutory provisions.

Link to download the order -   https://www.mytaxexpert.co.in/uploads/1770872763_ARUPBANERJIALLAHABADVS.DEPUTYCOMMISSIONEROFINCOMETAXCIRCLE1ALLAHABAD.pdf  

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