2009 (12) TMI 956 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of loss on hedging as speculative loss.
2. Disallowance of expenditure related to speculative transactions and taxable capital gains.

Summary:

Issue 1: Disallowance of Loss on Hedging as Speculative Loss
The assessee appealed against the order of the Commissioner of Income-tax (Appeals) confirming the Assessing Officer's disallowance of Rs. 24,96,424 as speculative loss. The assessee argued that derivatives are a separate class of business and the loss should be treated as a business loss, covered by proviso (d) of section 43(5) of the Income-tax Act, 1961. The Assessing Officer noted that the transactions were not made to guard against losses in the assessee's holdings and treated the loss as speculative. The Tribunal referenced the Special Bench decision in Shree Capital Services Ltd. v. Asst. CIT (2009) 318 ITR (AT) 1 (Cal), which held that clause (d) of the proviso to section 43(5) is prospective from April 1, 2006, and not applicable to the assessment year 2005-06. The Tribunal decided against the assessee, stating no case was made for referring the matter to a Larger Bench.

Issue 2: Disallowance of Expenditure Related to Speculative Transactions and Taxable Capital Gains
The assessee contested the disallowance of Rs. 3,20,259 and Rs. 42,50,885 by the Assessing Officer, who held these expenses were not for business purposes but related to speculative transactions and taxable capital gains. The assessee argued that such expenses should not be prorated between various activities. The Tribunal noted that expenses related to investment activities should be considered as incurred for earning dividend income and disallowed u/s 14A. The Tribunal directed the Assessing Officer to apply rule 8D of the Income-tax Rules, 1962, for a fresh decision, restoring the matter for reconsideration.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the disallowance of the hedging loss as speculative and remanding the issue of disallowed expenses for fresh consideration. The order was pronounced on December 17, 2009.