My company lost money trading in exchange traded derivatives. Section 43(5)(d) says those are not speculative transactions, so can I set the loss off against ordinary business income?
No, not if the Explanation to section 73 applies to the company. The Delhi High Court held that the exclusion of eligible derivative transactions from "speculative transaction" in section 43(5)(d) is confined to the provisions for which that definition was enacted, and does not carry into the Explanation to section 73. Derivatives take their value from the underlying stocks and shares, and if the share business itself is deemed speculative under the Explanation, so is the derivative business built on it. The Tribunal's order allowing carry forward of the Rs.4.92 crore loss was set aside and the Revenue's appeal allowed.
Decided by the High Court (High Court of Delhi - Justice S. Ravindra Bhat and Justice Najmi Waziri (judgment by S. Ravindra Bhat, J)) on 2013-07-11, reported as ITA 94/2013 (Delhi High Court), reserved 6 May 2013, pronounced 11 July 2013. It bears on section 73, section 43(5)(d), section 43(5) of the Income Tax Act 1961, in How Tax Law Is Read and Deductions & Disallowances matters.
This is the judgment that separates two provisions taxpayers routinely conflate. Section 43(5) defines a speculative transaction for the purposes of computing business income; the Explanation to section 73 deems certain companies' share business to be speculation business for the purposes of set off and carry forward. The Court held they answer different questions, so the 2005 carve-out for exchange traded derivatives does not open up set off for a company caught by the Explanation. The reasoning rests on a general principle worth keeping: a definition enacted for a restricted purpose is not to be applied to other ends, and context can displace a defined meaning even without the usual "unless the context otherwise requires" formula. It is a Revenue-favourable decision, and it has been widely followed, so a client trading derivatives through a company needs to check the Explanation before assuming the loss is an ordinary business loss.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee company claimed a loss of Rs.4,92,71,000 on the purchase and sale of shares, arising from trading in derivatives. It argued that by reason of section 43(5) - and in particular clause (d), inserted with effect from 1 April 2006, which takes eligible transactions in derivatives as defined in the Securities Contracts (Regulation) Act, 1956 out of the meaning of speculative transaction - the loss was not speculative and could not be disallowed as such. The Assessing Officer rejected that, holding that section 73 operates independently of section 43(5), that the Explanation to section 73 can apply to delivery based share transactions and to derivative trading alike, and that the company did not fall within any of the categories the Explanation excludes. He treated the loss as a speculation loss which could not be set off against business income. The Commissioner (Appeals) confirmed. The Tribunal, by order dated 30 November 2011, accepted the company's contention and allowed the relief in carry forward. The Revenue appealed under section 260A, and the Court framed the question whether the Tribunal had erred in not holding the loss to be a speculative loss in view of the Explanation to section 73.
The appeal was allowed and the question answered in favour of the Revenue. The Tribunal erred in law in holding the company entitled to carry forward the loss. The exclusion of derivative transactions from the expression "speculative transactions" in section 43(5) is confined in its application to the provisions for which that definition was enacted, and Parliament's intention that such transactions should also be excluded from the Explanation to section 73 is not borne out. Since derivatives are assets whose values are derived from underlying assets, and here the underlying assets were stocks and shares which fall squarely within the Explanation, it is idle to contend that the derivatives fall outside it when the underlying itself does not qualify for the benefit.
The Court began by locating section 43 in the scheme: it is a definition provision serving the computation of business income under sections 28 to 41, dealing with rent, taxes, insurance, repairs, depreciation, reserves, deductions, amounts not deductible and the like. Section 73 answers a different question. Its stated objective, apparent from its language, is to deny speculative businesses the benefit of carry forward of losses, and the Explanation was enacted to put beyond doubt that the share business of certain classes of companies is deemed speculative. The Court accepted that the only definition of derivatives in the Act is in section 43(5), but held that a definition enacted for a restricted purpose cannot be applied to other ends without doing violence to Parliament's intention. It relied on Vanguard Fire & General Insurance v Fraser and Ross, where the Supreme Court held that a defined word may bear a different meaning in different sections depending on subject and context, and that the court must look to the context, the collocation and the object of the words, and on N.K. Jain v C.K. Shah to the same effect. The Court emphasised that this contextual approach applies whether or not the definition carries the usual qualifying words. It then drew on the description of derivatives in Rajshree Sugars and Chemicals, and on the International Accounting Standard 39 definition set out there, to make the point that a derivative is one step removed from and entirely dependent on the underlying for its value. That the underlying share business is deemed speculative therefore settles the character of the derivative business built on it.
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.
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Handle my notice → Ask a CA on WhatsAppNo, not if the Explanation to section 73 applies to the company. The Delhi High Court held that the exclusion of eligible derivative transactions from "speculative transaction" in section 43(5)(d) is confined to the provisions for which that definition was enacted, and does not carry into the Explanation to section 73. Derivatives take their value from the underlying stocks and shares, and if the share business itself is deemed speculative under the Explanation, so is the derivative business built on it. The Tribunal's order allowing carry forward of the Rs.4.92 crore loss was set aside and the Revenue's appeal allowed. This was decided by the High Court (High Court of Delhi - Justice S. Ravindra Bhat and Justice Najmi Waziri (judgment by S. Ravindra Bhat, J)) and bears on section 73, section 43(5)(d), section 43(5) of the Income Tax Act 1961. It is reported as ITA 94/2013 (Delhi High Court), reserved 6 May 2013, pronounced 11 July 2013. This is the judgment that separates two provisions taxpayers routinely conflate. Section 43(5) defines a speculative transaction for the purposes of computing business income; the Explanation to section 73 deems certain companies' share business to be speculation business for the purposes of set off and carry forward. The Court held they answer different questions, so the 2005 carve-out for exchange traded derivatives does not open up set off for a company caught by the Explanation. The reasoning rests on a general principle worth keeping: a definition enacted for a restricted purpose is not to be applied to other ends, and context can displace a defined meaning even without the usual "unless the context otherwise requires" formula. It is a Revenue-favourable decision, and it has been widely followed, so a client trading derivatives through a company needs to check the Explanation before assuming the loss is an ordinary business loss. If it applies to you, the first step is this: Before advising that a derivative loss is a normal business loss, check whether the company falls within the Explanation to section 73 at all - the excluded categories in the Explanation are the first line of defence, not section 43(5)(d).
The assessee company claimed a loss of Rs.4,92,71,000 on the purchase and sale of shares, arising from trading in derivatives. It argued that by reason of section 43(5) - and in particular clause (d), inserted with effect from 1 April 2006, which takes eligible transactions in derivatives as defined in the Securities Contracts (Regulation) Act, 1956 out of the meaning of speculative transaction - the loss was not speculative and could not be disallowed as such. The Assessing Officer rejected that, holding that section 73 operates independently of section 43(5), that the Explanation to section 73 can apply to delivery based share transactions and to derivative trading alike, and that the company did not fall within any of the categories the Explanation excludes. He treated the loss as a speculation loss which could not be set off against business income. The Commissioner (Appeals) confirmed. The Tribunal, by order dated 30 November 2011, accepted the company's contention and allowed the relief in carry forward. The Revenue appealed under section 260A, and the Court framed the question whether the Tribunal had erred in not holding the loss to be a speculative loss in view of the Explanation to section 73. The matter was decided on 2013-07-11 by the High Court (High Court of Delhi - Justice S. Ravindra Bhat and Justice Najmi Waziri (judgment by S. Ravindra Bhat, J)). On those facts the High Court held as follows. The appeal was allowed and the question answered in favour of the Revenue. The Tribunal erred in law in holding the company entitled to carry forward the loss. The exclusion of derivative transactions from the expression "speculative transactions" in section 43(5) is confined in its application to the provisions for which that definition was enacted, and Parliament's intention that such transactions should also be excluded from the Explanation to section 73 is not borne out. Since derivatives are assets whose values are derived from underlying assets, and here the underlying assets were stocks and shares which fall squarely within the Explanation, it is idle to contend that the derivatives fall outside it when the underlying itself does not qualify for the benefit.
The Court began by locating section 43 in the scheme: it is a definition provision serving the computation of business income under sections 28 to 41, dealing with rent, taxes, insurance, repairs, depreciation, reserves, deductions, amounts not deductible and the like. Section 73 answers a different question. Its stated objective, apparent from its language, is to deny speculative businesses the benefit of carry forward of losses, and the Explanation was enacted to put beyond doubt that the share business of certain classes of companies is deemed speculative. The Court accepted that the only definition of derivatives in the Act is in section 43(5), but held that a definition enacted for a restricted purpose cannot be applied to other ends without doing violence to Parliament's intention. It relied on Vanguard Fire & General Insurance v Fraser and Ross, where the Supreme Court held that a defined word may bear a different meaning in different sections depending on subject and context, and that the court must look to the context, the collocation and the object of the words, and on N.K. Jain v C.K. Shah to the same effect. The Court emphasised that this contextual approach applies whether or not the definition carries the usual qualifying words. It then drew on the description of derivatives in Rajshree Sugars and Chemicals, and on the International Accounting Standard 39 definition set out there, to make the point that a derivative is one step removed from and entirely dependent on the underlying for its value. That the underlying share business is deemed speculative therefore settles the character of the derivative business built on it. In the words reproduced by the source cited on this page: "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."
It was decided by the High Court on 2013-07-11 and is reported as ITA 94/2013 (Delhi High Court), reserved 6 May 2013, pronounced 11 July 2013. 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 73, section 43(5)(d), section 43(5), 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 appeal was allowed and the question answered in favour of the Revenue. The Tribunal erred in law in holding the company entitled to carry forward the loss. The exclusion of derivative transactions from the expression "speculative transactions" in section 43(5) is confined in its application to the provisions for which that definition was enacted, and Parliament's intention that such transactions should also be excluded from the Explanation to section 73 is not borne out. Since derivatives are assets whose values are derived from underlying assets, and here the underlying assets were stocks and shares which fall squarely within the Explanation, it is idle to contend that the derivatives fall outside it when the underlying itself does not qualify for the benefit. It arises in How Tax Law Is Read and Deductions & Disallowances matters, on section 73, section 43(5)(d), section 43(5) of the Income Tax Act 1961, and was decided by High Court of Delhi - Justice S. Ravindra Bhat and Justice Najmi Waziri (judgment by S. Ravindra Bhat, 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. Identify the underlying of each derivative; the Court's reasoning turns on the underlying being stocks and shares, so a derivative on a commodity or currency stands differently. Do not argue that because "derivatives" is defined only in section 43(5), that definition must govern section 73; this judgment rejects that argument in terms. Where the Explanation applies, plan for the loss to be carried forward only against speculation profits, and price that into the accounts.
Still good law. I read the whole thirteen page judgment including the operative order allowing the Revenue's appeal. The harvested page records it as cited in 56 later decisions. I could not check separately whether the assessee took it to the Supreme Court, and note that the Explanation to section 73 was itself amended by the Finance Act, 2014 to change the excluded categories, which I have not been able to verify from the material before me. 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.
The batch line listed sections 73(1) and 28; the judgment turns on the Explanation to section 73 read against section 43(5) and its clause (d), and does not decide anything under section 73(1) or section 28 separately. The judgment repeatedly refers to the "Explanation to Section 73(4)"; the Explanation is to section 73 as a whole, and nothing in the reasoning turns on the sub-section number. The judgment also refers at one point to an "amended Section 43(4)" relied on by the Tribunal, which appears to be a slip for section 43(5). The source page carried no reporter citations, so the case number is given instead. 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 appeal was allowed and the question answered in favour of the Revenue. The Tribunal erred in law in holding the company entitled to carry forward the loss. The exclusion of derivative transactions from the expression "speculative transactions" in section 43(5) is confined in its application to the provisions for which that definition was enacted, and Parliament's intention that such transactions should also be excluded from the Explanation to section 73 is not borne out. Since derivatives are assets whose values are derived from underlying assets, and here the underlying assets were stocks and shares which fall squarely within the Explanation, it is idle to contend that the derivatives fall outside it when the underlying itself does not qualify for the benefit.
TaxSphere, “CIT v DLF Commercial Developers Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-dlf-commercial-developers-ltd/ (validity last checked 2026-08-29)
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