A taxpayer from Mathura earned Rs 8.64 crore through his real estate trading business. However, the said taxpayer alsoincurred a loss of around Rs 34 lakh from futures and options (F&O) trading in the stock market. When the taxpayer filed his income tax return (ITR), he reported the F&O loss as a business loss.The Income Tax Assessing Officer (AO) from I.P. Estate, New Delhi, did not allow this believing that since the taxpayer’s primary business was real estate trading rather than F&O trading, the AO treated the derivative loss as speculative in nature.The AO invoked the Explanation to Section 73 and consequently refused to allow the loss to be set off against the taxpayer’s regular business income. The assessment relied on the Delhi High Court ruling in CIT v. DLF Commercial Developers Ltd.The AO also disallowed Rs 10 lakh from the taxpayer’s overall business expenses, estimating that this portion was attributable to his share trading activities.As a result, the total disallowance connected with the taxpayer’s share and derivative transactions came to Rs 44 lakh. In addition, another disallowance of Rs 9,910 was made under Section 14A read with Rule 8D.The taxpayer challenged the assessment before the CIT(A), but the appellate authority upheld the AO’s decision. The matter was subsequently taken to the ITAT Delhi tax tribunal.The taxpayer eventually succeeded before the ITAT Delhi on July 10, 2026.
Why did the taxpayer win the case?
Chartered Accountant Suresh Surana told ET ITAT Delhi drew a distinction between transactions involving the purchase and sale of shares and those carried out in exchange-traded derivatives.The tribunal pointed out that the deeming provision contained in the Explanation to Section 73 is specifically directed at a company whose business involves the purchase and sale of shares of other companies. According to ITAT Delhi, the provision does not specifically bring futures and options transactions within its scope.The tribunal also noted that eligible derivative transactions executed on a recognised stock exchange are excluded from the definition of a speculative transaction under Section 43(5)(d).While arriving at its conclusion, ITAT Delhi relied on the Bombay High Court ruling in Souvenir Developers (India) Pvt. Ltd. v. Union of India. That judgment had also considered the Delhi High Court’s decision in DLF Commercial Developers. Based on this, ITAT Delhi concluded that the Explanation to Section 73 could not be stretched to cover exchange-traded derivative transactions.The taxpayer had reported a total trading loss of Rs. 34,21,431. Of this, ITAT Delhi classified Rs 9,11,932, which arose from the actual purchase and sale of shares, as speculative loss. The remaining Rs 25,09,499 represented derivative losses and was treated as an ordinary business loss, making it eligible for treatment and set-off under the provisions applicable to business losses.The tribunal also found that the Assessing Officer had not established any calculation, evidence or reasonable basis for attributing Rs 10 lakh of the taxpayer’s business expenditure to share-trading activities. Since the amount had been determined merely on an estimated basis, ITAT Delhi reduced the disallowance to Rs 1 lakh, which it considered fair and reasonable in the circumstances.This brought down the total disallowance from Rs 44,21,431 to Rs 10,11,932. The amount sustained consisted of Rs. 9,11,932 towards the share-trading loss and Rs 1 lakh towards the related expenditure. The remaining addition of Rs 34,09,499 was deleted.Surana said the tribunal also removed the separate Rs 9,910 disallowance made under Section 14A. The taxpayer’s financial records showed that no exempt dividend income had been earned during the relevant year.ITAT Delhi relied on the decisions in Cheminvest Ltd. v. CIT, CIT v. Holcim India Pvt. Ltd. and South Indian Bank Ltd. v. CIT to hold that a Section 14A disallowance cannot be imposed where there is no exempt income.The central reason for the taxpayer’s success was the AO’s treatment of derivative transactions as equivalent to the purchase and sale of shares. ITAT Delhi held that the deeming fiction contained in the Explanation to Section 73 has to be applied strictly and cannot be expanded to cover exchange-traded derivatives falling under Section 43(5)(d).Surana said the taxpayer had another two reasons in his favour. The Rs 10 lakh allocation of expenses by the AO was not supported by any proper basis, while the absence of exempt income meant there was no ground for making a disallowance under Section 14A.The appeal was consequently partly allowed. The tribunal sustained only the actual share-trading loss of Rs 9,11,932 and Rs 1 lakh towards the associated expenditure, while deleting the remaining additions.
