2017 (1) TMI 1752 - AT - Income Tax

Loss as a speculation loss - Loss as incurred on squaring off of erroneous trades executed on behalf of the clients and devolved on the appellant - allocation of expenses to the loss incurred on squaring off of erroneous trades - HELD THAT - Looking at the turnover and assessee s commission income, operational default by assessee s huge staff cannot be held as unreasonable. The assessee s total income is a loss and not a positive figure. The accounts are duly audited and follow the established rules and norms. The loss caused by operational default of the employees cannot be treated as loss on account of speculation activity of the assessee and such loss represents normal business exigencies. Such type of business exigencies cannot be assumed to be speculative activity so much to attract explanation to section 73. Expenses incurred by the appellant relate to its normal broking activity - HELD THAT - Since it is held that there no speculation activity carried on by the assessee consequently; there is no justification in disallowing the same expenditure assuming speculation activity. Besides assessee has demonstrated that expenditure disallowed represent institutional fees and other incidental expenses, which has not be factually disallowed by the authorities below. In view thereof, both the disallowances are deleted and the assessee s grounds are allowed.

Summary

Issues:
1. Application of Explanation to Section 73 for speculation loss
2. Allocation of expenses to speculation loss
3. Treatment of expenses related to normal broking activity
4. Justification of disallowances based on speculation activity
5. Similar loss in preceding year

Issue 1: Application of Explanation to Section 73 for speculation loss
The appellant contested the application of Explanation to Section 73, arguing that the loss incurred was due to operational errors in executing trades on behalf of clients, not speculation. The appellant explained that the loss was a result of business exigencies faced in the normal course of broking activities. Despite providing evidence, the AO and CIT(A) deemed the loss as speculation loss. However, the Tribunal held that the loss arising from operational defaults by employees cannot be categorized as speculation activity. The loss was deemed to represent normal business exigencies, not speculative activity attracting Explanation to Section 73.

Issue 2: Allocation of expenses to speculation loss
The appellant also challenged the allocation of expenses amounting to ?7,28,560 to the loss incurred on erroneous trades, further increasing the deemed speculation loss. The appellant contended that these expenses were related to its normal broking activity and were essential for undertaking broking services for clients. The Tribunal observed that since there was no speculation activity conducted by the appellant, there was no justification for disallowing the expenses assuming speculation activity. Consequently, the disallowance of expenses was deemed unwarranted, and the appellant's grounds were allowed.

Issue 3: Treatment of expenses related to normal broking activity
The appellant argued that the expenses incurred were wholly and exclusively for the purpose of its regular business as a corporate broking house registered on stock exchanges. These expenses included various levies, fees, and charges related to the performance of normal broking activities. The appellant provided detailed evidence to support the nature of these expenses, emphasizing their essential role in conducting broking services for clients. Despite the appellant's submissions, the CIT(A) upheld the disallowance of expenses. However, the Tribunal found that the expenses were legitimate and necessary for the appellant's broking business, leading to the deletion of the disallowances.

Issue 4: Justification of disallowances based on speculation activity
The authorities below disallowed expenses assuming speculation activity based on the loss incurred. However, the Tribunal determined that since there was no speculation activity conducted by the appellant, the disallowances were unjustified. The Tribunal emphasized that the loss caused by operational defaults of employees did not constitute a loss on account of speculation activity but rather represented normal business exigencies. Consequently, the disallowances were deemed inappropriate and were deleted in favor of the appellant.

Issue 5: Similar loss in preceding year
The appellant highlighted that a similar loss in the preceding year had not been objected to by the department under section 143(3). This argument was presented to demonstrate consistency in the treatment of losses incurred by the appellant. While the department relied on the orders of the authorities below, the Tribunal considered the lack of objection in the previous year as a relevant factor in assessing the treatment of losses. Ultimately, the Tribunal allowed the appellant's appeal, emphasizing the absence of speculation activity and the necessity of the expenses incurred for normal broking activities.

In conclusion, the Tribunal ruled in favor of the appellant, rejecting the application of Explanation to Section 73 for speculation loss and overturning the disallowance of expenses related to normal broking activities. The Tribunal emphasized that the loss incurred was due to operational defaults, not speculation, and that the expenses were essential for conducting broking services. The Tribunal's decision highlighted the distinction between normal business exigencies and speculative activities, leading to the allowance of the appellant's appeal.