2013 (2) TMI 825 - HC - Income Tax

Trading loss - Application of principles of arbitrariness, unreasonableness and perversity of approach - Held that - The opinion that the assessee generated a sizeable amount of loss out of pre-arranged transactions so as to reduce the quantum of income liable for tax might have been the view expressed by the AO, but he miserably failed to substantiate that. We are sorry to say that the learned Tribunal fell into the same error. One can generate a loss inter alia by suppressing his income or by selling his goods at an under value. It is nobody s case that the assessee either suppressed any income or sold anything at an under value. Therefore, it cannot be said by any stretch of imagination that any loss was generated. Loss might have been suffered. If the loss was suffered, then appropriate deduction has to be made and there is no reason why the Assessing Officer should have refused to do so. Tribunal restored the order of the Assessing Officer and set aside the order passed by the CIT (Appeal) without application of mind. Tribunal ignored the fact that the transaction was carried out at the prevailing price. Therefore, the question of generating loss could not have arisen. The suspicion entertained by the Assessing Officer was misplaced or in any event not substantiated.

Summary

Issues:
Challenge to judgment of Income Tax Appellate Tribunal setting aside CIT (Appeal) order and restoring Assessing Officer's order based on generating loss from share trading to reduce tax liability.

Analysis:
The appeal before the High Court challenged the judgment of the Income Tax Appellate Tribunal, which set aside the CIT (Appeal) order and restored the Assessing Officer's order. The main issue revolved around the Assessing Officer's conclusion that the assessee had artificially generated a trading loss to set off interest income, leading to a reduced tax liability. The Assessing Officer contended that the assessee consistently incurred losses in share trading over four assessment years, indicating a manufactured loss to offset interest income. However, the High Court found this conclusion to be without merit as the transactions were conducted at prevailing market rates, ruling out the possibility of artificial loss generation. The Court emphasized that the losses suffered were due to speculative market conditions and not misconduct or design.

The High Court highlighted that the CIT (Appeal) had thoroughly examined the matter and found no basis to support the Assessing Officer's claim of artificial loss generation. The Tribunal, upon reviewing the case, failed to appreciate this aspect and wrongly upheld the Assessing Officer's order without sufficient justification. The Court noted that the Assessing Officer and the Tribunal both erred in concluding that the assessee had artificially generated losses without concrete evidence. It was clarified that generating a loss requires either income suppression or undervalued sales, neither of which was proven in this case. Therefore, the suspicion raised by the Assessing Officer was deemed baseless and lacked substantiation.

In light of the above analysis, the High Court set aside the order under challenge and restored the order passed by the CIT (Appeal). The judgment emphasized the importance of factual accuracy and proper application of tax laws in assessing trading losses to prevent unwarranted conclusions. The decision underscored the need for concrete evidence and reasoned analysis to support allegations of artificial loss generation in tax assessments related to share trading activities.