2013 (4) TMI 10 - AT - Income Tax

Disallowing the claim derivative loss as speculation loss - Approved stock exchange - Clause (d) of proviso to Section 43(5) of the Income tax Act - Held that - once the approval is granted in the relevant previous year, and in the absence of anything indicated to the contrary, the approval has to be taken as effective from the beginning of the relevant year. - all the transactions entered into in the relevant previous year by the assessee in National Stock Exchange are to be treated as non-speculative transaction. No part of losses incurred in the relevant previous year can be treated as speculation loss and disallowance of expenses as relatable to such loss cannot also be made - Decided in favor of assessee.

Issues Involved:

1. Assessment of Income
2. Derivative Trading Loss
3. Expenses Attributable to Derivative Loss
4. Interest under Sections 234B and 234C

Issue-wise Detailed Analysis:

1. Assessment of Income:

The appellant contested the correctness of the CIT(A)'s order, which confirmed the addition of Rs. 10,49,033 to the returned income of Rs. 50,485. The appellant argued that the total income was determined correctly as per the provisions of the Income Tax Act and pleaded for the acceptance of the returned income and deletion of the additions.

2. Derivative Trading Loss:

The CIT(A) upheld the AO's action in disallowing the claim of loss of Rs. 9,47,087 on derivative transactions, treating it as speculation loss. The AO noted that the National Stock Exchange (NSE) was recognized by the Central Government on 25th January 2006, and transactions before this date were treated as speculative. The appellant argued that transactions fulfilled all conditions to be considered "eligible transactions" under proviso (d) to Section 43(5) and should be set off against business income. Alternatively, they argued that such transactions should be covered under proviso (b) or (c) of Section 43(5) and hence non-speculative.

The Tribunal found that the issue was covered by a coordinate Bench decision in the case of Prem Associates Advertising & Marketing vs JCIT, which held that transactions entered into recognized stock exchanges should be treated as non-speculative even if the recognition came later in the year. The Tribunal thus upheld the appellant's grievance, treating the derivative transactions as non-speculative and eligible for set-off against business income.

3. Expenses Attributable to Derivative Loss:

The CIT(A) upheld the AO's action in applying provisions of Explanation to Section 73 of the Income Tax Act, disallowing Rs. 2,00,000 as expenses attributable to derivative trading activity. The appellant argued that Explanation to Section 73 was not applicable as the loss was not from speculative business, and no specific expenditure was incurred solely for such activity. They contended that the entire business operation was one activity, and no apportionment of expenses should be made on a notional basis.

The Tribunal, agreeing with the appellant, held that once the transactions were treated as non-speculative, the disallowance of Rs. 2,00,000 as relatable to expenses incurred on speculation transactions should be deleted.

4. Interest under Sections 234B and 234C:

The CIT(A) upheld the AO's action in levying interest under Sections 234B and 234C. The appellant argued that the interest was levied without giving an opportunity for a hearing, violating the principles of natural justice, and prayed for the deletion of the interest levied.

The Tribunal noted that the levy of interest was consequential in nature. Since the additions were deleted, the foundation for such levy ceased to exist. Consequently, the grievances regarding the levy of interest were upheld.

Conclusion:

The Tribunal allowed the appeal, treating the derivative transactions as non-speculative and eligible for set-off against business income, deleting the disallowance of Rs. 2,00,000 in expenses, and nullifying the levy of interest under Sections 234B and 234C.

← Previous Next →