2009 (1) TMI 892 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transactions undertaken by the assessee were "ready forward transactions" and if they belonged to the assessee.
2. Whether the assessee, being a non-banking finance company, was subject to the RBI circulars prohibiting ready forward transactions.
3. Whether the losses incurred in the transactions could be set off against the profits earned.

Summary:

Issue 1: Ready Forward Transactions and Ownership
The appeals concern transactions by the assessee-company involving the purchase and sale of units of UTI 1964 for AYs 1992-93 and 1993-94. The Tribunal had remanded the issues back to the AO to ascertain if the transactions belonged to the assessee and to allow the setting off of business loss against business profit if they did. The AO disallowed the relief, treating the transactions as "deposits" rather than ready forward transactions. The CIT(A) granted relief, noting that the transactions were indeed ready forward transactions as per the Janakiraman Committee Report and the Supreme Court's criteria in BOI vs. Custodian (10 SCC 488, 1997).

Issue 2: Applicability of RBI Circulars
The assessee argued that as a non-banking finance company, it was governed by the Directions on Non-banking Finance Companies (RBI, 1977) and not by the Banking Regulation Act, 1949. The RBI circulars prohibiting ready forward transactions applied only to scheduled commercial banks, not to NBFCs. The CIT(A) agreed, noting that the RBI had not penalized the assessee, indicating no violation of any statute or guideline.

Issue 3: Set Off of Losses Against Profits
The CIT(A) observed that the AO's treatment of one leg of the transactions as business profits and the other as deposits was contradictory. The CIT(A) held that if the transactions were taxable, then losses should be offset against profits. The CIT(A) also considered whether these transactions were speculative u/s 43(5) of the Income Tax Act, 1961, concluding they were not, as units of UTI do not fall within the definition of stocks, shares, or commodities. Even if considered speculative, losses should still be set off against profits as per sec.73(1) of the Act.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, agreeing that the assessee, being a non-banking finance company, was not subject to the RBI circulars for banks and that the transactions were ready forward transactions. The Tribunal upheld the CIT(A)'s decision to allow the set-off of losses against profits, dismissing the revenue's appeals. The order was pronounced in the open court on 30.01.2009.