Facts of the Case

The assessee reported income of ₹60,19,056 from derivative trading but had inadvertently disclosed it under the head “Short-Term Capital Gains” in the return. He sought to set off this income against brought-forward losses of ₹75,35,030 from derivative trading incurred in Assessment Year 2008-09, which had also been shown earlier under capital gains.

The Assessing Officer concluded that frequent derivative transactions constituted business activity and reclassified the income as business income. However, he disallowed the set-off of past losses on the ground that capital losses cannot be adjusted against business income. The CIT(A), NFAC dismissed the appeal ex parte, treating the losses as speculative commodity losses under section 43(5).

Issues Involved

  1. Whether income from derivative trading constitutes business income rather than capital gains.
  2. Whether losses from derivative trading can be set off against income from similar derivative transactions.
  3. Whether classification in the return determines tax treatment or the true nature of transactions.
  4. Whether derivative trading losses are speculative under section 43(5).

Petitioner’s Arguments

The assessee contended that both the current income and the brought-forward losses arose from derivative trading and were wrongly reported under capital gains due to inadvertent errors.

It was argued that derivatives covered under clause (d) of section 43(5) are excluded from the definition of speculative transactions from 01.04.2006. Therefore, losses from such transactions are non-speculative business losses and eligible for set-off against similar income.

Reliance was placed on the principle that the real nature of the transaction, not the manner of disclosure, determines taxability.

 Respondent’s Arguments

The Revenue contended that since the assessee himself reported the income as capital gains, it could not subsequently be treated as business income for the purpose of allowing set-off. It was also argued that commodity derivative losses prior to the statutory amendment were speculative and not eligible for adjustment.

Court Order / Findings (ITAT Allahabad)

The Tribunal held that the Assessing Officer himself had reclassified the derivative trading income as business income based on the frequency and nature of transactions. Once this conclusion was reached, consistency required that losses from similar derivative trading be treated in the same manner.

The Tribunal emphasized that taxability depends on the true nature of the transaction, not on how it is described in the return. Since both the income and the losses arose from derivative trading and no evidence suggested they were from different activities, the losses were eligible for set-off.

It also found that the CIT(A) had misdirected himself by treating the transactions as commodity derivatives rather than financial derivatives excluded from speculative transactions under section 43(5).

Important Clarification

The Tribunal reaffirmed that errors in classification in the return do not override the substantive nature of transactions. Non-speculative derivative trading losses can be set off against similar income, and authorities must adopt a consistent approach once income is recharacterized.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771063215_ARUPBANERJIALLAHABADVS.DCITCIRCLE1ALLAHABAD.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.