My derivative loss is for a year before assessment year 2006-07. Can I argue that clause (d) of the proviso to s.43(5) is clarificatory and covers it?
No, in the Bombay High Court. Exchange-traded derivative transactions settled otherwise than by actual delivery are speculative transactions within the main part of s.43(5), and clause (d) of the proviso, inserted by the Finance Act 2005, operates prospectively from 1 April 2006 only. For years up to assessment year 2005-06 the loss is speculation loss.
Decided by the High Court (J. P. Devadhar J and R. S. Dalvi J) on 2011-04-18, reported as (2011) 337 ITR 452 (Bom); Income Tax Appeal No. 1539 of 2010. It bears on section 43(5), section 73, section 28, section 72 of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
This is the decision that fixes the boundary date, and it is the foundation of the later Bombay line - Souvenir Developers applies it to post-2006 years to reach the opposite result on the same reasoning. It matters in two live situations: old reopened or appellate years where the assessee still argues retrospectivity, and any year at all where the transaction is not an eligible transaction within clause (d), because the moment clause (d) fails the transaction falls back into the main definition and this reasoning governs. The Court's route also disposes of two arguments practitioners still run - that a futures contract is not a 'commodity' and that s.43(5) reaches only contracts capable of delivery.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a Hindu undivided family carrying on business in trading in shares and securities. During assessment year 2003-04 it entered into exchange traded derivative transactions and incurred a loss of Rs.28,37,707, which it claimed as a business loss. The Assessing Officer held the loss to be speculation loss under s.43(5), and the Commissioner (Appeals) dismissed the assessee's appeal. The Tribunal allowed the assessee's further appeal, holding that clause (d) of the proviso to s.43(5) was retrospective in nature so that losses from derivative transactions could not be treated as speculation losses. The Revenue appealed under s.260A, contending that derivative transactions are speculative within s.43(5) and that clause (d), operating from 1 April 2006, does not cover assessment year 2003-04.
The Revenue's appeal was allowed. Exchange traded derivative transactions carried on by the assessee during assessment year 2003-04 are speculative transactions covered by s.43(5), and the loss incurred in those transactions is speculative loss and not business loss. Clause (d) inserted to the proviso to s.43(5) with effect from 1 April 2006 is prospective in nature, and the Tribunal was in error in holding that it applied retrospectively to the transactions carried on in assessment year 2003-04 (para 39).
The Court began from the text of s.43(5), which makes a transaction speculative where a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips (paras 21 and 26). It read clause (d), inserted by the Finance Act 2005, as excluding only eligible derivative transactions under s.2(ac) of the Securities Contracts (Regulation) Act 1956 carried out on a recognised stock exchange, and reasoned that the very act of excluding them from 1 April 2006 confirms that they were covered by s.43(5) before that date (paras 22 and 23). On whether a futures contract is a transaction in a 'commodity', the Court took the word in its common parlance sense as an article of trade or commerce, examined the National Stock Exchange Handbook on Derivatives Trading on how stock and index futures are traded and settled in cash, and held that futures contracts, being articles of trade and commerce legally permitted to be traded on a stock exchange by force of s.18A of the 1956 Act inserted with effect from 22 February 2000, are transactions in a commodity for s.43(5) (paras 28 to 33). It rejected the argument that 'commodity' in s.43(5) excludes stocks and shares, holding that the section does not enlarge the meaning of commodity but clarifies that commodity transactions include transactions in stocks and shares (para 34), and rejected the argument that s.43(5) applies only to contracts capable of delivery, holding that the object of the provision is to treat transactions settled otherwise than by actual delivery as speculative and that the section is not restricted to deliverable contracts (para 35). On retrospectivity, the Court held that the legislature had specifically provided for clause (d) to operate prospectively from 1 April 2006 and that the provision was not needed to cure any unworkability in the existing text, so it could not be read as clarificatory (paras 36 and 37).
In the result, we hold that the exchange traded derivative transactions carried on by the assessee during AY 2003-04 are speculative transactions covered under Section 43(5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss and not business loss. We further hold that clause (d) inserted to the proviso to Section 43(5) with effect from 1/4/2006 is prospective in nature and the ITAT was in error in holding that clause (d) to the proviso to Section 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during AY 2003-04.
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Handle my notice → Ask a CA on WhatsAppNo, in the Bombay High Court. Exchange-traded derivative transactions settled otherwise than by actual delivery are speculative transactions within the main part of s.43(5), and clause (d) of the proviso, inserted by the Finance Act 2005, operates prospectively from 1 April 2006 only. For years up to assessment year 2005-06 the loss is speculation loss. This was decided by the High Court (J. P. Devadhar J and R. S. Dalvi J) and bears on section 43(5), section 73, section 28, section 72 of the Income Tax Act 1961. It is reported as (2011) 337 ITR 452 (Bom); Income Tax Appeal No. 1539 of 2010. This is the decision that fixes the boundary date, and it is the foundation of the later Bombay line - Souvenir Developers applies it to post-2006 years to reach the opposite result on the same reasoning. It matters in two live situations: old reopened or appellate years where the assessee still argues retrospectivity, and any year at all where the transaction is not an eligible transaction within clause (d), because the moment clause (d) fails the transaction falls back into the main definition and this reasoning governs. The Court's route also disposes of two arguments practitioners still run - that a futures contract is not a 'commodity' and that s.43(5) reaches only contracts capable of delivery. If it applies to you, the first step is this: Fix the assessment year first. For AY 2005-06 and earlier the exchange-traded derivative loss is speculation loss on this authority, and the argument has to be about set-off against other speculation profits, not about characterisation.
The assessee is a Hindu undivided family carrying on business in trading in shares and securities. During assessment year 2003-04 it entered into exchange traded derivative transactions and incurred a loss of Rs.28,37,707, which it claimed as a business loss. The Assessing Officer held the loss to be speculation loss under s.43(5), and the Commissioner (Appeals) dismissed the assessee's appeal. The Tribunal allowed the assessee's further appeal, holding that clause (d) of the proviso to s.43(5) was retrospective in nature so that losses from derivative transactions could not be treated as speculation losses. The Revenue appealed under s.260A, contending that derivative transactions are speculative within s.43(5) and that clause (d), operating from 1 April 2006, does not cover assessment year 2003-04. The matter was decided on 2011-04-18 by the High Court (J. P. Devadhar J and R. S. Dalvi J). On those facts the High Court held as follows. The Revenue's appeal was allowed. Exchange traded derivative transactions carried on by the assessee during assessment year 2003-04 are speculative transactions covered by s.43(5), and the loss incurred in those transactions is speculative loss and not business loss. Clause (d) inserted to the proviso to s.43(5) with effect from 1 April 2006 is prospective in nature, and the Tribunal was in error in holding that it applied retrospectively to the transactions carried on in assessment year 2003-04 (para 39).
The Court began from the text of s.43(5), which makes a transaction speculative where a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips (paras 21 and 26). It read clause (d), inserted by the Finance Act 2005, as excluding only eligible derivative transactions under s.2(ac) of the Securities Contracts (Regulation) Act 1956 carried out on a recognised stock exchange, and reasoned that the very act of excluding them from 1 April 2006 confirms that they were covered by s.43(5) before that date (paras 22 and 23). On whether a futures contract is a transaction in a 'commodity', the Court took the word in its common parlance sense as an article of trade or commerce, examined the National Stock Exchange Handbook on Derivatives Trading on how stock and index futures are traded and settled in cash, and held that futures contracts, being articles of trade and commerce legally permitted to be traded on a stock exchange by force of s.18A of the 1956 Act inserted with effect from 22 February 2000, are transactions in a commodity for s.43(5) (paras 28 to 33). It rejected the argument that 'commodity' in s.43(5) excludes stocks and shares, holding that the section does not enlarge the meaning of commodity but clarifies that commodity transactions include transactions in stocks and shares (para 34), and rejected the argument that s.43(5) applies only to contracts capable of delivery, holding that the object of the provision is to treat transactions settled otherwise than by actual delivery as speculative and that the section is not restricted to deliverable contracts (para 35). On retrospectivity, the Court held that the legislature had specifically provided for clause (d) to operate prospectively from 1 April 2006 and that the provision was not needed to cure any unworkability in the existing text, so it could not be read as clarificatory (paras 36 and 37). In the words reproduced by the source cited on this page: "In the result, we hold that the exchange traded derivative transactions carried on by the assessee during AY 2003-04 are speculative transactions covered under Section 43(5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss and not business loss. We further hold that clause (d) inserted to the proviso to Section 43(5) with effect from 1/4/2006 is prospective in nature and the ITAT was in error in holding that clause (d) to the proviso to Section 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during AY 2003-04."
It was decided by the High Court on 2011-04-18 and is reported as (2011) 337 ITR 452 (Bom); Income Tax Appeal No. 1539 of 2010. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 43(5), section 73, section 28, section 72, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Revenue's appeal was allowed. Exchange traded derivative transactions carried on by the assessee during assessment year 2003-04 are speculative transactions covered by s.43(5), and the loss incurred in those transactions is speculative loss and not business loss. Clause (d) inserted to the proviso to s.43(5) with effect from 1 April 2006 is prospective in nature, and the Tribunal was in error in holding that it applied retrospectively to the transactions carried on in assessment year 2003-04 (para 39). It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section 43(5), section 73, section 28, section 72 of the Income Tax Act 1961, and was decided by J. P. Devadhar J and R. S. Dalvi J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For AY 2006-07 onwards, prove each element of clause (d) - a derivative within s.2(ac) of the Securities Contracts (Regulation) Act 1956, on a recognised stock exchange, and an eligible transaction: electronic screen-based, through a SEBI-registered intermediary, evidenced by a time-stamped contract note with the client identity number. Do not run the argument that futures are not a commodity or that s.43(5) applies only to deliverable contracts; paras 33 to 35 close both. If the transaction is off-exchange or on an exchange not notified for clause (d), accept that this decision puts it back inside s.43(5) and plan the set-off accordingly.
Still good law. Applied by name and citation by the Bombay High Court itself in Souvenir Developers (I) Pvt. Ltd. v. Union of India, Income Tax Appeal No. 79 of 2018, decided 6 May 2022, which recorded at para 39 that the principles laid down here on clause (d) applied to that case and at para 42 that the Delhi High Court in CIT v. DLF Commercial Developers Ltd. had taken a view contrary to the view taken here. That is later treatment I read for myself. I did NOT check whether the assessee took this judgment to the Supreme Court, and I did not run a wider citator search. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Paragraph 37, rejecting the assessee's retrospectivity argument, describes clause (d) as 'inserted to the proviso to Section 43(5) of the IT Act by Finance Act, 1995 with effect from 1/4/2006'. Clause (d) was inserted by the Finance Act 2005; the reference to 1995 is an evident slip, repeated when the Bombay High Court reproduced the point in Souvenir Developers at para 38, and nothing turns on it because 1/4/2006 is given correctly. I transcribed paragraph 39 verbatim in full. Paragraphs 20 to 35 I read in a condensed transcription that compressed some sentences, so the reasoning field states the Court's route rather than its exact words, and I have quoted nothing from those paragraphs. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was allowed. Exchange traded derivative transactions carried on by the assessee during assessment year 2003-04 are speculative transactions covered by s.43(5), and the loss incurred in those transactions is speculative loss and not business loss. Clause (d) inserted to the proviso to s.43(5) with effect from 1 April 2006 is prospective in nature, and the Tribunal was in error in holding that it applied retrospectively to the transactions carried on in assessment year 2003-04 (para 39).
TaxSphere, “CIT v Shri Bharat R. Ruia (HUF)”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-bharat-r-ruia-exchange-traded-derivatives-clause-d-prospective/ (validity last checked 2026-09-07)
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