2011 (3) TMI 26 - AT - Income Tax

Set off - Speculative Loss - Disallowance of Rs.2, 04, 12, 594 being the amount of loss in respect of future and options transactions - The Assessing Officer came to the conclusion that it was to be treated as loss from speculation business in terms of section 43(5) - Held that Insertion of clause (d) of proviso to section 43(5) is prospective in nature as applicable from 2006-2007 - in view of Special Bench of the tribunal in Shree Capital Services Limited v. ACIT 2009 -TMI - 59828 - ITAT CALCUTTA issue decided in favor of revenue. Disallowance of Administrative expenses have been incurred for F & O transactions amounting to Rs.4, 94, 649 - Explanation 2 to section 28 clearly provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business the speculation business shall be deemed to be distinct and separate from any other business - speculation business and non-speculation business are to be considered as distinct from each other and consequently the common expenses debited to the profit and loss account also need bifurcation into these two segments - The splitting of expenses on the basis of turnover in the absence of other reasonable measure suggested by the learned A.R. is reasonable - Issue is decided in favour of Revenue. Adjustment u/s 115JB - diminution in the value of investments - Rs.1.25 crores - Once provision is made for diminution in the value of any asset the same has to be added for computing book profit regardless of the fact whether or not there is any balance value of the asset. - as the Explanation 1 to section 115JB(2) deals with the computation of book profit and specifically provides that the net profit as shown in the profit and loss account for the relevant previous year has to be increased inter alia by the amount of provision for diminution in the value of any asset the amount of provision for diminution in the value of any asset debited to the profit and loss account before the determination of net profit has necessarily to be added. - Decided in favor of revenue.

Issues Involved:

1. Deletion of disallowance of loss from future and options (F&O) transactions.
2. Deletion of disallowance of administrative expenses related to F&O transactions.
3. Deletion of addition to book profit for diminution in the value of shares.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Loss from Future and Options (F&O) Transactions:

The first issue revolves around the treatment of a loss amounting to Rs. 2,04,12,594 from F&O transactions. The assessee-company claimed this loss as a business loss, but the Assessing Officer (AO) treated it as a speculation loss under section 43(5) of the Income Tax Act. Consequently, the AO disallowed the adjustment of this loss against non-speculation business income. The CIT(A) overturned the AO's decision, treating the loss as a non-speculation business loss. However, the Tribunal referred to the Special Bench decision in Shree Capital Services Limited v. ACIT, which held that losses from derivatives (F&O transactions) should be treated as speculation losses up to the assessment year 2005-2006. Since the assessment year in question is 2004-2005, the Tribunal reversed the CIT(A)'s decision and restored the AO's action, allowing the ground raised by the Revenue.

2. Deletion of Disallowance of Administrative Expenses Related to F&O Transactions:

The second issue concerns the disallowance of administrative expenses amounting to Rs. 4,94,649, which were incurred for F&O transactions. The AO disallowed these expenses, arguing that they should not be allowed against non-speculation business income, given his treatment of the F&O loss as a speculation loss. The CIT(A) allowed the deduction of the entire expenses, treating the F&O loss as a non-speculation loss. However, since the Tribunal reversed the CIT(A)'s decision on the treatment of the F&O loss, it also reversed the decision on the deductibility of the administrative expenses. The Tribunal upheld the AO's method of bifurcating the expenses based on the ratio of turnover from speculation and non-speculation businesses, determining that Rs. 4,94,649 related to speculation business. Thus, this ground raised by the Revenue was also allowed.

3. Deletion of Addition to Book Profit for Diminution in the Value of Shares:

The last issue involves the addition of Rs. 1,25,00,000 to the book profit under section 115JB, representing a provision for diminution in the value of shares of "RFB Latex Limited." The AO added this amount to the book profit, while the CIT(A) deleted the addition. The Tribunal examined the applicability of section 115JB, which defines "book profit" and mandates certain adjustments to the net profit as shown in the profit and loss account. The Tribunal referred to the Supreme Court judgment in CIT v. HCL Comnet Systems and Services Limited, which dealt with similar provisions under section 115JA. The Tribunal noted that subsequent amendments to section 115JB clarified that provisions for diminution in the value of any asset must be added back to the net profit for computing book profit. The Tribunal rejected the assessee's argument that the treatment of the provision in the balance sheet should affect its inclusion in book profit. The Tribunal concluded that the provision for diminution in the value of investment, debited to the profit and loss account, must be added back to the net profit for computing book profit. Consequently, the Tribunal restored the AO's action and allowed the ground raised by the Revenue.

Conclusion:

In summary, the Tribunal allowed the Revenue's appeal on all three grounds, reversing the CIT(A)'s decisions and restoring the AO's actions regarding the treatment of F&O losses, the disallowance of related administrative expenses, and the addition to book profit for diminution in the value of shares. The order was pronounced on the 9th day of March, 2011.

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