2018 (5) TMI 1839 - AT - Income Tax

Loss from derivative transactions - treated as speculative loss OR business loss - Applicability of Section 43(5) on derivative transactions. - Loss from trading in delivery based share transactions treated as speculative loss instead of short term capital gains - HELD THAT - Assessee claimed the same as business losses. AO rejected the said claim and accordingly treated both the losses as speculative loss. In respect of loss from derivative transactions, the CIT(A) upheld the view taken by the AO by taking support from Explanation 73. In respect of short term capital loss, CIT(A) took the view that the assessee was incurring losses only to set off against Long term capital gain and accordingly confirmed the order of AO. Since the exception provided in provisions of sec. 43(5) is applicable to these transactions, we are of the view that there is merit in the claim of the assessee. Accordingly we direct the AO to assess loss arising from derivative transactions as business loss. Rejection of claim of set off of Long term capital gains and Income from other sources against the above said losses - HELD THAT - In the instant case, we are of the view that the planning, if any, done by the assessee is within the framework of law. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to accept the short term capital loss arising from sale of shares as declared by the assessee. Since we have held that both the above said losses cannot be treated as speculative losses, the AO is directed to allow set off losses against other income as per the provisions of the Act. Disallowance of interest expenditure - HELD THAT - Loss from derivative transactions and short term capital loss has to be accepted as business loss, the interest expenditure, if any, relating thereto is required to be allowed after due verification in terms of sec 36(1)(iii). The assessee had taken mortgage loan of ₹ 20.00 lakhs and incurred interest expenditure of ₹ 2,74,213/-. The assessee initially claimed the same against income from house property. Now it is claimed that the same may be allowed against business income. Since the user of loan proceeds shall decide the allowability of the interest expenditure, we restore this issue to the file of the AO for examining it in accordance with the law. Option of selecting self occupied property - assessee was owning three house properties, viz., house located at Juhu, Santacruz (E) and Vasai - declared Vasai property as self occupied property - Wanted to substitute Juhu Property as self occupied property - HELD THAT - Since the provisions of the Act nowhere states that the option of selecting self occupied property, once exercised, cannot be changed, we are of the view that there is merit in the contentions of the assessee. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to adopt Juhu Property as self occupied property of the assessee.

Summary

Issues:
1. Loss from trading in derivatives treated as speculative loss instead of business loss.
2. Loss from trading in delivery based share transactions treated as speculative loss instead of short term capital gains.
3. Rejection of claim of set off of Long term capital gains and Income from other sources against the above said losses.
4. Disallowance of interest expenditure.
5. Rejection of claim for change of Self Occupied Property for the purpose of computing Income from House Property.

Issue 1 - Loss from trading in derivatives:
The assessee claimed the loss as a business loss, but the AO treated it as speculative loss. The Ld CIT(A) upheld this view based on Explanation 73 of the Act. However, the ITAT found that the AO did not provide reasoning for treating the losses as speculative. As the exception in sec. 43(5) applied to these transactions, the ITAT directed the AO to assess the loss from derivative transactions as a business loss, setting aside the Ld CIT(A)'s order.

Issue 2 - Loss from trading in delivery based share transactions:
The ITAT noted that the assessee actually incurred the short term capital loss on sale of securities taken on delivery basis. The Ld CIT(A) suggested the loss was to set off against Long Term Capital Gains, but the ITAT disagreed, stating that such planning is permissible within the law. Therefore, the ITAT directed the AO to accept the short term capital loss as declared by the assessee.

Issue 3 - Set off of losses:
As the ITAT held that the losses cannot be treated as speculative, it directed the AO to allow set off losses against other income as per the Act.

Issue 4 - Disallowance of interest expenditure:
Regarding interest expenditure, the ITAT found that the user of loan proceeds determines the allowability of interest expenditure. Therefore, the ITAT restored this issue to the AO for proper examination in accordance with sec 36(1)(iii) of the Act.

Issue 5 - Change of Self Occupied Property:
The assessee sought to substitute a property as self-occupied, but the AO and Ld CIT(A) rejected this change. The ITAT held that there is no prohibition in the Act against changing the self-occupied property once selected. Therefore, the ITAT directed the AO to adopt the property chosen by the assessee as self-occupied.

In conclusion, the ITAT allowed the appeal of the assessee, setting aside the orders of the lower authorities on various issues related to the treatment of losses, interest expenditure, and self-occupied property selection.