Income Tax Act, 1961

--Speculative business--Speculative loss Applicability of Explanation to section 73 vis-a-vis carry forward and set off of losses--Assessee claimed a huge loss of Rs.493 lakhs on account of purchase and sale of shares. Assessee contended that trading in derivatives was not a speculative loss in terms of section 43(5), which was rejected by assessing officer. Assessing officer held that section 43(5) applies since it was independent of section 43(5) and that was applicable in derivative trading also. The revenue authorities held that above stated loss could not be set off against business income. Tribunal, however, allowed assessee's appeal. Held: Not justified. It is idle to contend that derivatives do not fall within provision of Explanation to section 73 when the underlying asset itself does not quality for the benefit, as they (derivatives), once removed from it are entirely dependent on stocks and shares for determination of their value. Tribunal, therefore, erred in law in holding that assessee was entitled to carry forward its losses.

The assessee is, no doubt, correct in contending that the only definition of derivatives is to be found in section 43 (5); yet, the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression 'speculative transactions' is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to section 73(4), however, is not borne out. [Para 8] It is no doubt, tempting to hold that since the expression 'derivatives' is defined only in section 43(5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus, contextual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms (such as 'unless the context otherwise requires') are used. [Para 10] The stated objective of section 73 apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, 'derivatives are assets, whose values are derived from values of underlying assets'; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives once removed from it and entirely dependent on stocks and shares, for determination of their value). [Para 11] Tribunal erred in law in holding that the assessee was entitled to carry forward its losses. [Para 12]

Income Tax Act, 1961, Section 43(5)

Income Tax Act, 1961, Section 73, Explanation

In the Delhi High Court

S. Ravindra Bhat & Najmi Waziri