2014 (9) TMI 1083 - AT - Income Tax

Penalty u/s 271(1)(c) - addition made by mere change of head of income - assessee considered NCDEX/MCX as a stock exchange within the meaning of section 43(5) of the Act and thereby considered the commodity trade loss as a business loss against speculation loss - Held that - coordinate Bench of this Tribunal in the case of ACIT vs. Arnav Akshay Mehta (2012 (9) TMI 447 - ITAT MUMBAI) wherein it was held that assessee s derivative trading through MCX stock exchange in the A.Y. 2007-08 is non-speculation transaction and, therefore, loss incurred is to be treated as normal business loss. The Bench also observed that transactions carried out through MCX stock exchange after 1-4-2006 would be eligible for being treated as nonspeculation within the meaning of section 43(5)(d) of the Act. In the instant case also the assessment year under consideration is A.Y. 2007-08, therefore, as per the proposition laid down by the co-ordinate Bench above the loss incurred by the assessee should be treated as normal business loss. Once such loss is treated as business loss, mere treatment by the A.O. as speculation loss will not be justified to levy penalty u/s 271(1)(c) of the Act. Thus we hold that addition made by mere change of head of income will not attract penalty u/s 271(1)((c) of the Act. The A.O. is directed to delete the same - Decided in favour of assessee

Summary

Issues:
Penalty under section 271(1)(c) for treating business loss as speculative loss.

Analysis:
The appeal was against the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, for treating a business loss as speculative. The assessee had incurred a loss in commodity exchange, which was initially treated as business loss and set off against other business income. However, the Assessing Officer (A.O.) levied a penalty, alleging inaccurate particulars and concealment of income. The dispute revolved around whether the loss from commodity transactions should be considered a business loss or speculative loss.

Upon review, it was found that the derivative transactions in recognized stock exchanges, including NCDEX and MCX, were settled without actual delivery or transfer of assets. The Tribunal determined that trading in commodities on these exchanges constituted business activities, and the loss incurred was correctly set off against other business income. Although the assessee initially misinterpreted the nature of the transactions, it was rectified during assessment.

The Tribunal referred to a previous decision where it was established that losses from derivative trading through MCX stock exchange were non-speculative and should be treated as normal business losses. Moreover, the treatment of business loss as speculative loss did not warrant a penalty under section 271(1)(c) of the Act. Citing legal precedents, it was clarified that a mere change in the head of income, even if incorrect, did not justify the imposition of a penalty.

Consequently, the Tribunal ruled in favor of the assessee, directing the A.O. to delete the penalty. The decision highlighted that the addition made due to a change in the classification of income did not meet the threshold for penalty under section 271(1)(c) of the Income Tax Act, 1961. The appeal was allowed, and the judgment was pronounced on 19th September 2014.