The real estate businessman lost Rs 34.21 lakh in F&O trading; Taxman termed it speculative, but ITAT Delhi allowed Rs 25.09 lakh as business loss: here’s why

A taxpayer from Mathura earned Rs 8.64 crore through his real estate trading business. However, the said taxpayer also suffered a loss of around Rs 34 lakh from trading in futures and options (F&O) in the stock market. When the taxpayer filed his income tax return (ITR), he declared the F&O loss as a business loss.The Income Tax Assessing Officer (AO) of IP Estate, New Delhi, did not allow this believing that since the main business of the taxpayer was real estate trading rather than F&O trading, the AO treated the loss on derivatives as speculative in nature.The AO invoked Explanation to Section 73 and accordingly refused to allow the loss to be set off against the regular business income of the taxpayer. The assessment was based on the judgment of the Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd.The AO also disallowed Rs 10 lakh of the general business expenses of the taxpayer, estimating that this portion was attributable to his stock trading activities.As a result, the total disallowance related to taxpayer participation and derivative transactions amounted to Rs 44 lakh. Further, another amount of Rs 9,910 was disallowed 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 later taken up to ITAT Delhi tax court.The taxpayer was finally successful before ITAT Delhi on July 10, 2026.

Why did the taxpayer win the case?

Chartered accountant Suresh Surana told ET ITAT Delhi that he made a distinction between transactions involving the purchase and sale of shares and those carried out in exchange-traded derivatives.The court noted that the deeming provision contained in the Explanation of Article 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 include futures and options transactions within its scope.The court also noted that eligible derivative transactions executed on a recognized stock exchange are excluded from the definition of a speculative transaction under Section 43(5)(d).In reaching its conclusion, ITAT Delhi relied on the judgment of the Bombay High Court in the Souvenir Developers (India) Pvt. Limited case. Ltd. v. Union of India. That judgment had also considered the Delhi High Court’s decision in the DLF Commercial Developers case. Based on this, ITAT Delhi concluded that the Section 73 Explanation could not be extended to cover exchange-traded derivative transactions.The taxpayer had declared a total business loss of Rs. 34,21,431. Of this, ITAT Delhi classified Rs 9,11,932, which arose from actual purchase and sale of shares, as speculative loss. The remaining Rs 25,09,499 represented consequential losses and was treated as an ordinary business loss, making it eligible for treatment and compensation under the provisions applicable to business losses.The court also found that the Assessing Officer had not established any reasonable calculation, evidence or basis for attributing Rs 10 lakh of the taxpayer’s business expenses 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 reduced the total disallowance from Rs 44,21,431 to Rs 10,11,932. The amount sustained consisted of Rs. 9,11,932 towards share trading loss and Rs 1 lakh towards related expenses. The remaining amount of Rs 34,09,499 was removed.Surana said the court also deleted the separate disallowance of Rs 9,910 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 of Cheminvest Ltd. v. CIT, CIT v. Holcim India Pvt. Limited. Ltd. and South Indian Bank Ltd. v. CIT to hold that Section 14A disallowance cannot be imposed when 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 deemed fiction contained in the Explanation to Section 73 must be strictly applied and cannot be extended to cover exchange traded derivatives falling under Section 43(5)(d).Surana said the taxpayer had two other reasons in his favor. The AO’s allocation of expenditure of Rs 10 lakh was not supported by any proper basis, while the absence of exempt income meant that there was no reason to make a disallowance under Section 14A.Consequently, the appeal was partially upheld. The court only sustained the actual share trading loss of Rs 9,11,932 and Rs 1 lakh for associated expenses, while deleting the remaining additions.