Vimal Oil & Foods Ltd., Ahmedabad vs Assessee

Vimal Oil & foods Ltd., 4th Floor, Heritage Building, Nr. Grand Bhagwati Hotel, S.G. Road, Ahmedabad Appellant

Vs.

ACIT, Circle-8, Ahmedabad Respondent

PAN: AABCV 0765H

अपीलाथ क ओर से /By Appellant : Shri Dinesh Singh, D.R. यथ क ओर से/By Respondent : Shri Hiren J. Trivedi, A.R. सुनवाई क तार ख/Date of Hearing : 30.12.2014 घोषणा क तार ख/Date of Pronouncement : 9.01.2015

ORDER

PER SHAILENDRA KUMAR YADAV, J.M:

This appeal has been filed by the Assessee against the order of Commissioner of Income Tax (Appeals)-XIV, Ahmedabad, dated 04.08.2011 for A.Y.2008-09 on the following grounds:

I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 2

"On the facts and in the circumstances of the appellant's case, the learned CIT(A) has erred in confirming disallowance of expenditure of Rs.1,31,37,264 incurred by the appellant company in connection with Public Issue.

On the facts and in the circumstances of the appellant's case, the learned CIT(A) has erred in confirming disallowance of loss of Rs.4,82,270 incurred by the appellant company on trading in commodity derivatives.

The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or at the time of hearing of the appeal."

2. At the outset of hearing, learned AR does not want to press Ground No.1. Hence the same is dismissed as not pressed. The only issue remains with regard to disallowance of loss of Rs.4,82,270/- incurred by the assessee company on trading in commodity derivatives. The Assessing Officer made disallowance of loss of Rs.4,82,270/- incurred on commodity derivative. The Assessing Officer while making the disallowance observed as under:

"During the course of assessment proceedings it was noticed that the assessee had incurred a loss of Rs.482270/- on commodity trading which had been claimed as regular business expenditure rather than as a speculation loss that would not be allowed to be set off against the regular business income. The assessee was asked to show cause as to why the said expenditure should not be held as a speculation loss and as to why it should not be disallowed for the purpose of computation of normal Business Income.

The provision of the Act is clear. If a contract is periodically or ultimately settled otherwise than by the actual delivery of the commodity, then the transaction is to be regarded as a speculative transaction. The proviso to the section carves out certain exceptions to the meaning of speculative transaction. Clause(d) of the Proviso in facts deems certain transaction to be regarded as a business transaction I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 3

rather than a speculative transaction, which but for the proviso would be speculative transaction. The proviso is a deeming proviso and therefore as per the rules of interpretation has to be strictly construed. One of the mandatory requirements of the deeming proviso is that the eligible transaction has to be carried out in a recognized Stock Exchange as notified by the Central government in this regard.

4.5 The CBDT in exercise of powers conferred upon it has issued Notification No. SO 1327(E), dated 22.05.2009, which deals with the matter. The said Notification is reproduced for ready reference.

In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act, 1961 (43 of 1961), read with rule 6DDB of the Income-tax Rules, 1962, the Central Government hereby notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause with effect from the date of publication of this notification in the Official Gazette.

2. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical inspection by the Director-General of Income-tax (Investigation) having exchange and provide copies of the relevant information as and when required.

3. The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDA of the Income-tax Rules, 1962, subject to which the recognition is granted, is violated.

4. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule(5) of rule 6DDB of the Income-tax Rules, 1962 - Notification No. SO 1327(E), dated 22-5-2009.

The provision and the mandate of the Act read with the above referred Notification that although the transaction in commodity derivative is a speculation transaction, it is deemed I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 4

not to be so by virtue of the clause (d) of the Proviso to section

43. However the Notification is applicable only from 22-05- 2009 and not before it. Therefore the transaction in commodity derivative would be deemed not to a speculative transaction from 22-05-2009. Prior to 22-05-2009, the transaction in commodity derivative would be treated as a speculative transaction. Since the transactions of the assessee have been prior to 22-05-2009, the transaction of the assessee has to be in the nature of Speculative Transaction. Once it is established that the loss, occurring to the assesses is a speculative loss, the provisions of Section 73(l) would be applicable, which states that the loss in Speculation Business can be set off only against profit of another Speculation Business. In the case of the assessee, there is no other Speculative Business and therefore, the assessee would not be entitled to set off this loss against Normal Business income. The deduction of this loss is therefore denied to the assessee. The assessee is however allowed to carry forward the speculation loss to be set off in accordance with the provisions of the Act."

2.1 The matter was carried before the First Appellate Authority wherein various contentions were raised on behalf of the assessee.

3. Having considered the same, CIT(A) confirmed the order of Assessing Officer by observing as under:

"I have carefully perused the assessment order and the written submission filed by the ld. AR of the appellant. The AO has rightly disallowed the deduction of loss by utilizing the definition of speculative transaction as provided in proviso (d) to section 43(5). He has held that since the MCS Stock Exchange Limited was notified by the Central Government w.e.f. 22/05/2009, the transaction in commodity derivative would be deemed to be a speculative transaction till 22/05/2009. He accordingly held the transaction to be speculative and did not allow the set of loss against normal I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 5

business income. In my opinion, the A. O. has interpreted the relevant provisions correctly.

At the appellate stage, the appellant has claimed that his case falls directly under Clause (a) of Section 43(5) and there is no requirement to fulfill the condition laid down in Clause (d). The appellant has claimed that the company has entered into future contracts in derivatives through registered and recognized broking firms which are engaged in trading in futures on commodity exchanges and such contracts are for efficient, economic and smooth running of business for the purpose of procuring raw material with a view to guard against losses due to price fluctuations. It is claimed by the appellant that the transaction in commodity futures are in the nature of hedging transactions to safeguard against the price fluctuations of the raw material. The claim of the appellant is not supported by any evidence. During the course of appellate proceedings, the appellant was asked to furnish the evidence to prove that the transactions were in the nature of hedging transaction. However, the appellant has not furnished any evidence in this respect. For claiming that the transaction was a hedging transaction, the appellant has to prove that both the transactions of actual purchase and the transactions in the future markets have been done simultaneously and a nexus in the two transaction has to be demonstrated and established by the appellant. The appellant has failed to do so, and therefore, the claim of the appellant that these are hedging transactions is not accepted. Therefore the loss of R.4,82,270/- incurred by the appellant company on trading of commodity derivatives is held to be not allowable as per clause

(a) of Section 43(5) also and the ground of appeal is, therefore, dismissed.

4. Before us learned AR submitted that ITAT Mumbai 'A' Bench in the case of Assistant Commissioner of Income Tax, Mumbai Vs. Arnav Akshay Mehta as reported in (2012) 25 taxmann.com 252 (Mum.) has held as under:

'By Finance Act, 2005, clause (d) was inserted in the proviso to sub-section (5) of section 43 with effect from 1-4-2006, which provided that an 'eligible transaction in respect of trading in I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 6

derivative referred to in clause (a) of section (2) of Securities Contract (Regulation) Act, 1956, carried out in a recognized Stock Exchange' shall not be deemed to be speculative transactions. Thus, from 1-4-2006, trading in derivative carried through the recognized Stock Exchange was treated as non- speculative transactions. For the purpose of clause (d), Rule 6DDA and 6DDB of Income-tax rules, 1962 provided that notification of recognized Stock Exchange has to be done by the Central Govt. (CBDT). In pursuance to this rule, the CBD1 had notified the MCX Stock Exchange Ltd. by S.O. 1327(E) dated 22- 5-2009. [Para 8]

Effective date of statute prevails upon procedural mechanism

" Thus, the issue was whether such a notification given on 22-5- 2009, through which MCX Stock Exchange had been recognized, could be held to be applicable for the transaction undertaken in the assessment year 2007-08 i.e., after 1-4- 2006. From the combined reading of clause (d) of proviso to section 43(5), Rule 6DDA, 6DDB and Explanation (ii) to section 43(5), it would be seen that the rules which have been prescribed are only procedural in nature, as they prescribe the method as to how to apply for necessary recognition and consequent notification. Hence, these are purely procedural mechanism.

• When a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective unless such an inference is likely to lead to an absurdity. If the amendment is made in procedural mechanism, it will apply to all the proceedings pending or to be initiated. Once in the statute, it has been provided that with effect from 1-4-2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculation transaction, then simply because procedural mechanism has taken a long time to recognize the Stock Exchange, it will not lead to an inference that the same would be applicable from the date when the Stock Exchange has been recognized by the Central Govt.

• The notification issued under Rule 6DDB, does not empower any right or create obligation but only recognizes -what is already provided in statute. Thus, the transactions carried out through MCX Stock Exchange after 1-4-2006, would be eligible I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 7

for being treated as non-speculative within the meaning of clause (d) of proviso to section 43(5).

Various case laws, as have been relied upon by the assessee also support this view that recognition by the Central Govt. of the Stock Exchange from a later date will not debar the transaction as non-speculative, especially after 1-4-2006. • Therefore, it was to be opined that the assessee's derivative trading through MCX Stock Exchange in the assessment year 2007-08 was non-speculative transaction and, therefore, the loss incurred in such transactions was to be treated as normal business loss and, accordingly, the findings of the Commissioner (Appeals), to this extent, were to be upheld. Accordingly, the ground raised by the revenue was to be dismissed. [Para 9]."

5. In view of the above, we are of the view that assessee's derivative trading through MCX Stock Exchange in A.Y.2007-08 was non speculated transaction; therefore, loss incurred in such transactions was to be treated as normal business loss. We find that by Finance Act, 2005 Clause (d) was inserted in proviso to sub Section (5) of Section 43 w.e.f. 1.4.2006 which provided that an eligible transaction in respect of trading in derivative referred to in clause (a) of sub Section (2) of Securities Contract (Regulation) Act, 1956 carried out in a recognized Stock Exchange shall not be deemed to be speculative transactions.

Thus, from 1st April, 2006 trading in derivative carried through the recognized Stock Exchange was treated as non-speculative transactions. For the purpose of clause (d), Rule 6DDA and 6DDB of IT Rules, 1962, provided that notification of recognized Stock Exchange has to be done by the Central Gove. (CBDT). In pursuance of this Rule, the CBDT has notified the MCX Stock Exchange Ltd. by S.O. 1327(E) dated 22.05.2009. The issue in I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 8

such a notification given on 22.05.2009, by which MCX Stock Exchange has been recognized, could be held to be applicable for the transaction undertaken in the A.Y.2007-08 i.e. after 1st April, 2006. From the combined reading of clause (d) of proviso to section 43(5), Rule 6DDA, 6DDB and Explanation (ii) to section 43(5), it would be seen that rules which have been prescribed are only procedural in nature, as it prescribes the method as to how to apply for necessary recognition and consequent notification. Hence, these are purely procedural mechanism adopted for the same when a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective unless such an inference is likely to lead to an absurdity. If the amendment is made in procedural mechanism, it will apply to all the proceedings pending or to be initiated. Once in the statute, it has been provided that w.e.f. 1.4.2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculative transaction, then simply because procedural mechanism has taken a long time to recognize the Stock Exchange, it will not lead to an inference that the same would be applicable from the date when the Stock Exchange has been recognized by the Central Govt. The notification issued under Rule 6DDB, does not empower any right or create obligation but only recognizes what is already provided in statute. Thus, the transactions carried out through MCX Stock Exchange after 1.4.2006, would be eligible for being treated as non-speculative I.T.A. No. 2392/Ahd/2011 A.Y. 2008-2009 (Vimal Oil Foods Ltd. Vs. ACIT, Cir-8 Ahmedabad) Page 9

derivates within the meaning of clause (d) of proviso to section 43(5).

6. In view of the above, the Assessing Officer is directed to delete the disallowance of loss of Rs.4,82,270/- incurred by assessee company on trade in commodity derivatives.

7. In the result, the Appeal of the Assessee is partly allowed.

Sd/- Sd/- (ANIL CHATURVEDI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Prabhat kumar kesarwani Copy forwarded to: 1. The Appellant- 2. The Respondent- 3. The CIT 4. CIT(Appeals) 5. The DR 6. Guard File (ITA No. 2392/Ahd/2011) By Order

A.R., Ahmedabad.