2016 (7) TMI 561 - AT - Income Tax

Disallowance of speculation loss u/s.43(5) - hedging transactions or speculative transactions - Held that - We find that the ld.CIT(A) while deciding the issue has noted that the assessee had done transactions through HDFC Bank and Karvy Stock Broking Ltd., the transactions done through HDFC Bank were very few, whereas the transactions done through Karvy Stock Broking Ltd. were frequent and the number of transactions done with Karvy Stock Broking Ltd. indicated that they were not in the nature of hedging transactions but were in the nature of speculative transactions. Therefore concluded that the transactions done through HDFC Bank were linked with the business of the assessee and therefore could be considered as hedging transactions, whereas the transactions through Karvy Stock Broking Ltd. were in the nature of speculative transactions. He accordingly directed the loss incurred on the transactions through HDFC Bank be allowed and the loss incurred on the transactions with Karvy Stock Broking Ltd. be considered in speculative in nature. Before us, Assessee and Revenue have not placed any material on record to controvert the findings of ld.CIT(A) Addition made u/s.36(1)(vii) - Held that - We find that the ld.CIT(A) while deciding the issue in favour of assessee has noted that the transactions with the Directors were of current account type and there was opening credit balance in the account for which the Directors did not charge any interest from the assessee and assessee has also not charged the interest. He has further given finding that the interest-free funds in the form of Share Capital were far in excess of the amount advanced to the Director and in view the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT), no disallowance u/s.36(1)(iii) of the Act was called for. Before us, Revenue has not placed any material on record to controvert the findings of ld.CIT(A) - Decided in favour of assessee

Issues Involved:
1. Treatment of loss on forward cover transactions as speculative or business loss.
2. Disallowance of interest expenses due to interest-free loans to the Director.
3. Treatment of ROC fees as capital expenditure.
4. Non-adjudication of ROC fees under section 35D.
5. Request for costs due to arbitrary order.

Detailed Analysis:

1. Treatment of Loss on Forward Cover Transactions:
The primary issue revolves around whether the loss on forward cover transactions should be treated as speculative loss under Section 43(5) of the Income Tax Act or as business loss. The AO disallowed ?39,33,576/- considering it speculative since the transactions were not conducted on a recognized exchange. The CIT(A) partially agreed, distinguishing between transactions through HDFC Bank (considered hedging and thus business loss) and those through Karvy Stock Broking Ltd. (considered speculative due to their frequency and nature). The Tribunal upheld CIT(A)'s decision, noting no new evidence was presented to challenge the findings.

2. Disallowance of Interest Expenses:
The AO disallowed ?2,16,762/- of interest expenses, asserting that interest-bearing funds were diverted for non-business purposes (interest-free loans to the Director). The CIT(A) reversed this, noting the company's sufficient interest-free funds and referencing the decision in Reliance Utilities and Power Ltd. The Tribunal upheld CIT(A)'s decision, finding no contrary evidence from the Revenue.

3. Treatment of ROC Fees as Capital Expenditure:
The Assessee contested the treatment of ROC fees as capital expenditure. The CIT(A) upheld the AO's decision, and the Tribunal found no reason to interfere, as the Assessee did not press this ground further.

4. Non-adjudication of ROC Fees under Section 35D:
The Assessee raised an alternate plea for allowing ROC fees under Section 35D, which was not adjudicated by CIT(A). This ground was not pressed further before the Tribunal and was thus dismissed.

5. Request for Costs:
The Assessee requested costs due to the arbitrary nature of the departmental order. This ground was not pressed before the Tribunal and was dismissed.

Conclusion:
Both the Revenue's and Assessee's appeals were dismissed. The Tribunal affirmed the CIT(A)'s decisions on key issues, including the partial allowance of business loss on forward cover transactions and the deletion of interest expense disallowance. The Assessee's additional grounds regarding ROC fees and costs were not pressed and thus dismissed.

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