There is no reason to doubt that conditions of Explanations to section 43(5) fulfilled when statement of account from brokers certifying derivative trades submitted
In a recent judgment, ITAT Allahabad has held that ideally, the assessee should submit the time stamped contract notes but considering that the time stamped contract notes may be very voluminous, where the assessee furnishes a statement of account from its brokers certifying that the trades have actually taken place and yielded the results claimed by the assessee, there is no reason to doubt that the conditions of the Explanations to section 43(5) had been met.
ABCAUS Case Law Citation:
4687 (2025) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of set-off of loss from ‘Derivative Trading ‘ against the normal income from business and professional on the ground that appellant has not submitted any of the contract notes of the broker and sub-broker.
The appellant assessee was a Doctor who was also indulged in Derivative Trading. During the assessment year in question, the assessee claimed a large amount of derivative loss and sought to set off the same against the business profit from medical profession.
In justification of his claim, the assessee submitted that the results of derivative trading were verifiable from the broker’s statement and the audited statement of profit and loss.
The Assessing Officer (AO) noted, that as per the provisions of section 43(5), a few conditions should be fulfilled before derivative transactions could be claimed as business transactions. However, the assessee had not submitted any of the contract notes of the broker or the sub broker, as required under explanation 1 and 2 to section 43(5) of the Income Tax Act, 1961 (the Act).
Therefore, the AO treated the loss from derivative transactions as a speculative loss and refused to allow it to be adjusted against the business income of the assessee.
Before the CIT(A), the assessee submitted that the AO had failed to appreciate that as per the definition of speculative transactions given in section 43(5), Derivative Trading was specifically excluded from the definition of, “speculative transaction”. As far as contract notes were concerned, the assessee submitted that during the course of assessment proceedings, the assessee had furnished the audited statement of derivative trading account and also produced the books of accounts alongwith all supporting bills, vouchers and contract notes. He further submitted that after the survey proceedings carried out at his place, all the contract notes and broker statement had been furnished by the assessee as well as the brokers in compliance to the notice issued under section 133(6) seeking the copy of the contract notes and the brokers statement of account.
The assessee also submitted that in the previous assessment years in his case, ITAT had held that since the assessee had filed certificates from three recognized stock brokers who had carried out the transactions on behalf of the assessee, the disallowance of set off of loss from derivative trading against the normal business income was unjustified and the set off was deserving of being allowed.
However, the CIT(A) noted that no such certificate had been filed either before the AO or during the appeal proceedings. In view of the same, since the assessee had not been able to establish that trades had been carried out through time stamped contract notes, the CIT(A) dismissed the appeal of the assessee.
Before the Tribunal, the assessee submitted that he had submitted before the AO, a copy of the audited derivative trading account and also submitted statements from the brokers. The CIT(A) had derived a wrong presumption regarding the non-filing of brokers statements.
It was further submitted that the Department had called for information from all three brokers under section 133(6) of the Act and therefore, all these details stood furnished before the Department. However, despite these, the assessee had not been allowed the benefit of set off, when there was no doubt about the fact that the loss from derivatives was in the nature of regular business loss.
The Revenue contended that despite the stand of the assessee that he did the business of derivative trading, there was no reflection of the same in the income tax returns filed by the assessee and the assessee had been asked to reply to the same. The assessee was seeking the set off of loss from derivative trading on the basis of audited profit and loss account but he had in fact violated the provisions of section 44AB / Rule 12(2), by not furnishing the tax audit report in respect of derivative transactions electronically alongwith the audited financials of his medical profession. Moreover, he had taken it to “other income”.
It was further stated that transactions in derivative could be held to be business transactions other than speculative transactions only if the conditions laid down in the Explanations to section 43(5) were fulfilled. These were that the trading had to be done on a screen, through a recognized broker, on a recognized stock exchange and supported by time stamped contract notes. Therefore, to avail the benefits of classification, the assessee had to adhere to all the conditions of the Explanations 1& 2 of section 43(5).
It was also pointed out that the principle of estoppel and res judicata did not apply to income tax proceedings. Merely, because in a previous year, the Tribunal had held that the assessee was entitled to set off his derivative loss against his other business income, could not be a ground to claim the right to do so in this year without submitting the desired details before the ld. AO, to establish that the claim was bona fide for this year also.
In response, the assessee contended that since his main occupation was providing medical services therefore, he had not specifically mentioned the details of derivative trading separately in the income tax return filed as the profit and loss in the business of derivative trading was recorded in his capital account. However, the profit and loss from derivative trading was separately shown in the statement showing computation of total income and in the audited statement of account.
It was submitted that there was no violation on the part of the assessee. Furthermore, it was submitted that the derivative trading account had been separately audited and the net loss had been transferred to the capital account. Therefore, it stood included in the figures reflected in the income tax return. It was also submitted that there was no option before him to file multiple audit reports and therefore, the annexures were not uploaded.
The Tribunal observed that in previous years, the issue of whether derivative trading done by the assessee can be regarded as a business loss has been considered and decided in favour of the assessee by the ITAT. On the strength of this judgment, the assessee had been claiming the derivative loss of this year also as business loss. However, as correctly pointed out by the Revenue, the principle of res judicata does not apply to income tax proceedings. In income tax proceedings, the assessee must furnish the basic details that are called for to bring himself within the ambit of the beneficial provisions of the Explanations 1 & 2 to section 43(5) that allow the income / loss from derivative trading to be considered as a business income of the loss – by submitting the necessary information to the AO to demonstrate that he meets the conditions laid down in the Explanations and audited trading account is not a substitute for the documents that are required to be examined by the AO as per the Explanations to section 43(5).
The Tribunal opined that ideally, the assessee should submit the time stamped contract notes but considering that the time stamped contract notes may be very voluminous, the ITAT had held that where the assessee furnishes a statement of account from its brokers certifying that the trades have actually taken place and yielded the results claimed by the assessee, there is no reason to doubt that the conditions of the Explanations had been met.
The Tribunal further noted that there was a controversy in this year as to whether such statements from brokers have been submitted or not.
The Tribunal noted that the assessee submitted that he had filed the statements but the Revenue disputed this. The CIT(A) had also disallowed the appeal of the assessee on this account.
The Tribunal noted the submission of the assessee that he had filed digital copy of the contract notes immediately after the survey on his hard disk, but there was no evidence presented, that the hard disk that were impounded / handed over, contained the digital copies of the contract notes.
The Tribunal observed that it was fairly clear that the assessee had not filed details before the AO which are required to satisfy the AO that the assessee fulfills all the conditions that are laid down in the Explanations 1 & 2 to section 43(5). Further, enquiries had been made under section 133(6) with the brokers, the results of which had not been brought on record.
The Tribunal further observed that it cannot be oblivious to the history of the assessee’s case where the assessee had, year after year, been trading in derivatives through the exact same brokers and in previous years, the trades had been held to be of such a nature that they fulfilled the conditions, as laid down in the Explanations to section 43(5).
As a result, the Tribunal restored the matter to the file of the AO for examination of the material to determine whether the trade executed by the assessee meet the conditions of the Explanations 1 & 2 to section 43(5).
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