2015 (6) TMI 284 - AT - Income Tax

Disallowance of loss - transactions related to sale purchase of shares and derivatives/commodity trading - As per CIT(A) AO was not justified in treating the transactions of derivative trading and commodity future as speculative, and directed AO to allow the set off of loss incurred from derivative trading against the profit earned from commodity future, sale & purchase of shares and commission earned on sale & purchase of land - Held that - In the present case, it is an admitted fact that the assessee was engaged in the business of dealing in shares & securities and have incurred loss from dealing in derivatives (shares futures). It is not the case of the AO that the share futures in which the assessee was dealing were not recorded in recognized Stock Exchange, the loss incurred by the assessee was also not disputed by the AO. We, therefore, by keeping in view the provisions contained in clause (d) to Subsection (5) of Section 43 of the Act, are of the view that the ld. CIT(A) was fully justified in directing the AO for not treating the loss incurred by the assessee on derivatives and the profit earned if trading of the commodity as speculative in nature, For the aforesaid view, we are also fortified by the decision of the ITAT Mumbai B Bench in the case of R.B.K. Securities (P) Ltd. Vs ITO (2008 (7) TMI 949 - ITAT MUMBAI). - Decided against revenue.

Issues Involved:

1. Whether the transactions related to sale and purchase of shares and derivatives/commodity trading were speculative transactions.
2. Whether the loss incurred from derivative trading could be set off against profit earned from other business activities.
3. Applicability of Section 73 and Section 43(5) of the Income Tax Act, 1961.
4. Addition made by AO invoking the provisions of Rule 8D under Section 14A of the Act.

Issue-wise Detailed Analysis:

1. Speculative Transactions and Applicability of Section 73 and Section 43(5):

The primary issue was whether the transactions related to the sale and purchase of shares and derivatives/commodity trading were speculative transactions. The Assessing Officer (AO) treated the transactions of derivative trading and commodity trading as speculative in nature, thus disallowing the set-off of the loss incurred from derivative trading against other business profits. The AO invoked Explanation to Section 73 and Explanation 2 to Section 28 of the Income Tax Act.

The assessee argued that the transactions in derivatives were not speculative as per Section 43(5) of the Act, which excludes certain transactions from being deemed speculative. The assessee relied on judicial pronouncements and CBDT circulars recognizing transactions through recognized stock exchanges as non-speculative. The CIT(A) agreed with the assessee, holding that the AO's action was contrary to Section 43(5)(c) and (d) of the Act.

2. Set-off of Losses:

The assessee incurred a loss of Rs. 95,06,474/- from trading in share futures and earned a profit of Rs. 74,72,122/- from trading in commodity futures. The AO considered both as speculative, allowing set-off only to the extent of commodity profit and treating the balance loss as speculative. The CIT(A) directed the AO to allow the set-off of the loss incurred from derivative trading against the profit earned from commodity futures, sale & purchase of shares, and commission earned on the sale & purchase of land.

3. Judicial Precedents and Legal Provisions:

The CIT(A) and the Tribunal relied on various judicial precedents, including G.K. Anand Bros. Buildwell (P) Ltd. vs. ITO, Seema Jain vs. ACIT, and RBK Securities (P) Ltd. vs. ITO, which held that losses from derivative trading carried out in recognized stock exchanges should be treated as business losses and not speculative. The Tribunal emphasized that the provisions of Section 43(5)(d) specifically exclude eligible transactions in derivatives from being deemed speculative.

4. Addition under Section 14A:

The assessee's Cross Objection included a ground against the addition of Rs. 31,922/- made by the AO under Rule 8D of Section 14A. However, this ground was not pressed by the assessee during the proceedings.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, dismissing the department's appeal and the assessee's cross-objection. The Tribunal confirmed that the loss from derivative trading was not speculative and should be set off against other business profits. The Tribunal also noted that the AO did not bring any material to prove the speculative nature of the commodity trading profit. Thus, the CIT(A) was justified in directing the AO to allow the set-off of the loss incurred from derivative trading against other business profits. The appeal of the department and the cross-objection of the assessee were both dismissed.

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