2012 (9) TMI 430 - AT - Income Tax

Disallowance on account of loss of derivatives Assessee incurred loss on derivative transactions - Notification issued by the Central Govt. u/s 43(5) read with Rule 6 DDA, and 6 DDB, on 25.1.2006 - Treated derivative transaction as speculative loss Held that - CIT(A) examined that assessee did not incur net loss during this period. Prior to the notification, assessee received net gain from transactions in F&O. AO has no basis for arriving at a derivative trading loss. Therefore appeal decide in favour of assessee Addition on account of unexplained cash credit u/s 68 Held that - Department representative has not pointed out any factual error in the findings of CIT(A). The assessee has filed all these evidence before the AO. The AO in his order has in a very casual manner, without giving any reasons as to why the evidence furnished by the assessee was not acceptable, made the addition. Therefore, ITAT do not find any reason as to why the issue is to be set aside to the file of the AO. Appeal decides in favour of assessee Disallowance of interest expense - The bank granted overdraft facilities for business purposes AO made addition on basis that assessee has surplus funds in the form of undistributed profits of the earlier year Addition made on presumption that the surplus funds have to be held as used for giving money to directors/sister concerns - Held that - where the assessee has own funds as well as borrowed funds and it advanced funds to the sister concern for allegedly non business purposes, then a presumption can be made that the advances for non-business purposes have been made out of own funds following the decision Reliance Utilities Limited (2009 (1) TMI 4). Appeal decides in favour of assessee.

Summary

Issues:
1. Disallowance of loss on derivatives
2. Addition of unexplained credit balances
3. Disallowance of interest on overdraft limit

Analysis:
1. Disallowance of Loss on Derivatives:
The Revenue challenged the deletion of disallowances made by the assessing officer on account of loss of derivatives. The Revenue argued that the loss on derivative transactions should be treated as speculative loss. However, the CIT (A) concluded that the assessee did not incur a net loss during the relevant period and actually received a net gain from transactions in futures and options. The Tribunal upheld the CIT (A)'s decision, citing precedents in favor of the assessee. Therefore, the Tribunal dismissed Ground No. 1 of the Revenue's appeal.

2. Addition of Unexplained Credit Balances:
The Revenue contested the deletion of an addition made by the assessing officer regarding unexplained credit balances in the assessee's account. The CIT (A) thoroughly examined each transaction and evidence provided by the assessee, concluding that the addition was not sustainable. The Tribunal noted that the assessing officer had made the addition without proper justification, while the CIT (A) meticulously analyzed the evidence. As a result, the Tribunal upheld the CIT (A)'s decision and dismissed this ground of the Revenue's appeal.

3. Disallowance of Interest on Overdraft Limit:
Regarding the disallowance of interest on overdraft limit, the Revenue argued that there was a diversion of funds for non-business purposes, justifying the disallowance. However, the Tribunal found that the bank had granted the overdraft facilities for business purposes, aligning with the Supreme Court's precedent that no disallowance can be made when a loan is granted for business purposes. Additionally, the Tribunal noted that the assessee had surplus funds from undistributed profits, indicating that the funds were used for business purposes. Citing relevant legal precedents, the Tribunal upheld the order on this issue and dismissed the Revenue's ground. Consequently, the appeal of the Revenue was dismissed.

4. Cross Objections:
The cross objections filed by the assessee were dismissed as infructuous since they were in support of the CIT (A)'s order on issues raised by the Revenue. The Tribunal also dismissed the remaining grounds of the cross objections as not pressed. Ultimately, both the appeal of the Revenue and the cross-objection filed by the assessee were dismissed by the Tribunal.