2011 (3) TMI 52 - AT - Income Tax

Adjustment of speculation loss - section 73 - speculative transactions under section 43(5) - Held that - it is wholly immaterial whether or not the losses from non delivery based transactions, i.e. in trading in futures, are speculation losses or not. The profits of the assessee, being from share trading transactions which is the undisputed position, are hit by the provisions of Explanation to Section 73 and these profits can thus only be treated as speculation profits and, as speculation losses of trading in futures can thus be offset against speculation profits, there is no error in the speculation losses, even if that be so, being set off against profits of speculation business. The line of demarcation thus implied canvassed by the revenue against non delivery based speculation losses and losses in the speculation business under deeming fiction of Explanation to Section 73 is devoid of legally sustainable merits. There is no infirmity in the losses in non delivery based transactions being set off against profits of speculation business under the deeming fiction of Explanation to Section 73 of the Act.

Issues Involved:

1. Justification of the Commissioner in exercising revision powers under Section 263 of the Income Tax Act, 1961.
2. Verification of share transactions in futures and their classification as speculation gains or losses.
3. Eligibility of set-off for speculation losses against business profits under Section 73 of the Income Tax Act.
4. Adequacy of the Assessing Officer's examination of transactions during the assessment.

Detailed Analysis:

1. Justification of the Commissioner in Exercising Revision Powers under Section 263:

The core issue in this appeal was whether the Commissioner was justified in exercising revision powers under Section 263 of the Income Tax Act, 1961, concerning the assessment year 2005-06. The Commissioner initiated revision proceedings on the grounds that the details of purchase and sale of share transactions in futures were not verified to determine if the profit or loss from the futures trading amounted to speculation gains or losses. However, the Tribunal found that the reasons for revision proceedings set out in the show cause notice differed from the conclusions drawn in the final revision order. The show cause notice focused on the ineligibility of set-off for speculation losses against business profits, while the final order emphasized the lack of necessary verification by the Assessing Officer. This discrepancy rendered the revision order unsustainable in law.

2. Verification of Share Transactions in Futures and Their Classification as Speculation Gains or Losses:

The Commissioner's revision order was based on the premise that the Assessing Officer did not verify whether the profits or losses from futures trading amounted to speculation gains or losses. The Tribunal noted that the Commissioner's shifting stance on the reasons for revision-initially focusing on the ineligibility of set-off and later on the lack of verification-was not supported by the show cause notice. The Tribunal cited precedents, including the case of Maxpack Investments Ltd Vs ACIT, which emphasized that the grounds for revision must be clearly stated in the show cause notice to provide the assessee an adequate opportunity to respond.

3. Eligibility of Set-Off for Speculation Losses Against Business Profits under Section 73:

On merits, the Tribunal found that the assessee's stand was covered by the jurisdictional High Court's judgment in CIT Vs Lokmat Newspapers Pvt Ltd. The High Court held that irrespective of whether profits from share trading arose from delivery-based or non-delivery-based trading, as long as the assessee is hit by the Explanation to Section 73, the entire profits will be deemed to be speculation profits. Consequently, losses from non-delivery-based activities (futures trading) are eligible for set-off against profits from delivery-based transactions. The Tribunal concluded that there was no error in allowing the set-off of speculation losses against speculation profits, as the revenue authorities cannot selectively apply the provisions of Explanation to Section 73.

4. Adequacy of the Assessing Officer's Examination of Transactions During the Assessment:

The Tribunal observed that the Commissioner's revision order criticized the Assessing Officer for not making necessary verifications about the transactions. However, the Tribunal found that the Commissioner's direction to obtain complete details and conduct necessary inquiries was unsustainable, as the initial show cause notice did not raise this issue. The Tribunal emphasized that the grounds for revision must be explicitly stated in the show cause notice to provide the assessee an opportunity to address them.

Conclusion:

The Tribunal quashed the impugned revision order, deeming it devoid of jurisdiction and unsustainable on merits. The appeal was allowed, and the Tribunal pronounced its decision in the open court on 31st March 2011.

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