2011 (9) TMI 225 - AT - Income Tax

Reassessment - Futures & Options loss - speculation loss or not - The assessee is a Hindu Undivided Family deriving share income / loss from a partnership firm and loss from share trading and income from other sources - The Assessing Officer has also referred to the fact that the Futures & Options transactions are not delivery based and therefore they are covered by the definition of a speculative transaction under section 43(5) of the Act. But the Assessing Officer himself has accepted these transactions to be non-speculative in nature and as being hedging transaction within the meaning of clause (b) of the proviso while completing the original assessment - The mere fact that the transactions were not delivery based, does not amount to tangible material because even during the original assessment proceedings it was known to the Assessing Officer that these transactions were not delivery based - Unless there is tangible material to show that the character of the F&O transactions is not that of hedging transactions, the reopening of the assessment cannot be sustained. Till such tangible material is available to the Assessing Officer, the reopening is vulnerable to the challenge of being a mere review of the earlier assessment - Therefore, the notice under section 148 has been issued on a mere change of opinion - The reassessment is therefore invalid.

Summary

Issues:
Jurisdiction to reopen assessment under section 147, Treatment of F&O loss as speculation loss, Interpretation of section 43(5) regarding speculative transactions.

Jurisdiction to Reopen Assessment under Section 147:
The appeal involved a challenge to the jurisdiction of the Assessing Officer to reopen the assessment under section 147. The Assessing Officer reopened the assessment based on the belief that income chargeable to tax had escaped assessment due to the treatment of F&O loss against short term capital gains. The appellant contended that the reopening was a mere change of opinion, citing the Supreme Court judgment in CIT v. Kelvinator of India Ltd. The court analyzed the reasons recorded for reopening and the original assessment proceedings. It noted that the Assessing Officer previously accepted the F&O transactions as hedging transactions and allowed the set off against short term capital gains. The court found that the reasons recorded did not establish a valid reason for reopening, lacking a live link with the belief formed, and concluded that the reassessment was invalid, quashing the same.

Treatment of F&O Loss as Speculation Loss:
The core issue revolved around the treatment of F&O loss as speculation loss. The Assessing Officer disallowed the adjustment of speculation loss against short term capital gains, leading to an increase in taxable income. The appellant argued that the F&O loss arose from hedging transactions falling under proviso (b) to section 43(5), thus not being speculative transactions. The CIT(A) dismissed the contentions, leading to the present appeal. The court delved into the provisions of section 43(5), particularly proviso (b) and clause (d) introduced by the Finance Act, 2005. It highlighted that hedging transactions were not considered speculative transactions under clause (b). The court analyzed the Assessing Officer's reasoning for disallowing the set off, emphasizing the lack of tangible material to doubt the character of the transactions previously accepted as hedging. It concluded that without such tangible material, the reopening of assessment could not be sustained.

Interpretation of Section 43(5) Regarding Speculative Transactions:
Section 43(5) defines "speculative transaction" and includes provisos exempting certain transactions from being speculative. The court specifically examined clause (b) and clause (d) introduced by the Finance Act, 2005. It noted that clause (d) exempted eligible transactions in derivatives from being speculative, effective from the assessment year 2006-07. The court emphasized the distinction between hedging transactions and speculative transactions under the provisos. It highlighted that the Assessing Officer's acceptance of the transactions as hedging in the original assessment lacked tangible material to support a change in opinion during reassessment. The court's analysis focused on the legal interpretation of the provisions to determine the treatment of F&O transactions and the impact on taxable income.

In conclusion, the court invalidated the reassessment due to lack of valid reasons for reopening, emphasizing the importance of tangible material to support a change in assessment. The judgment highlighted the distinction between speculative and hedging transactions under section 43(5) and the significance of adhering to legal provisions in determining taxable income.